OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to the Board of Supervisors of Louisiana State University and Agricultural and Mechanical College's (LSU) approximately \$131 million of auxiliary revenue and refunding bonds, series 2015.

The fixed-rate bonds are expected to price via negotiation on or about April 21. Bond proceeds will be used principally to advance refund series 2007 and 2008 auxiliary revenue bonds (\$84 million) and finance three campus housing construction and renovation projects (\$47 million).

In addition, Fitch has affirmed the 'AA-' rating on LSU's approximately \$444 million of currently outstanding auxiliary revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of LSU, secured by and payable from a pledge of gross auxiliary revenues.

KEY RATING DRIVERS

Stable Auxiliary Operations: LSU's position as the state flagship institution for higher education and research drives steady student demand that results in auxiliary enterprise revenue growth and consistently solid coverage of auxiliary-related debt service.

UNIVERSITY Credit Profile: The university's fairly diverse revenue base, adequate balance sheet liquidity, and moderate debt burden support overall stability. However, significant state funding reductions contribute to negative operating margins on a full accrual basis. (Louisiana GOs are rated 'AA' with a Stable Rating Outlook.)

Tuition FLEXIBILITY: LSU's affordability continues to provide additional, although not unlimited, pricing flexibility. The university leadership team has prudently managed lower state funding through tuition and fee increases coupled with healthy enrollment growth.

Manageable Debt Burden: Manageable capital and related financing plans primarily for fully self-supporting auxiliary enterprises should help LSU maintain a moderately low to moderate pro forma debt burden. Steady state capital support for academic and research related projects should further benefit LSU's debt position.

RATING SENSITIVITIES

Student Demand: While not expected, material enrollment declines that affect the university's ability to service auxiliary revenue bonds could lead to negative rating action. Support for auxiliary enterprise-related debt service relies on student demand.

LSU Credit Strength: Continued operating deficits or a materially increased use of leverage could negatively affect LSU's auxiliary revenue bond rating over time, given the interrelationship of the university's overall credit profile and auxiliary enterprise operations.

CREDIT PROFILE

Founded in 1853 and located in Baton Rouge, LSU is the flagship campus of the Louisiana State University System (the system). The university is comprised of 13 colleges and institutions offering 69 bachelors, 74 masters, and 50 doctoral degree programs. LSU is progressing through a planning initiative, LSU2015, to optimize educational, research, economic development, and operational capabilities by realigning many governance and administrative functions. A primary goal of the effort was the merger of the LSU chancellor and system president positions, which took effect in July 2013. The system expects to finalize the reorganization by fiscal year 2016.

Steady headcount enrollment growth averaging 1.7% annually over the past five years to 30,451 in fall 2014 supports system operations, particularly as the state continues to reduce financial support. Freshman acceptance and matriculation rates are stable at about 76% and 45%, respectively. Graduate enrollment, too, is steady.

Student demand indicators remain healthy as of March 2015. Freshman applications and admittances for fall 2015 are trending ahead of the same time last year by 5.5% and 9.8%, respectively, according to management.

STABLE AUXILIARY ENTERPRISE OPERATIONS

LSU's auxiliary enterprise revenues generate solid coverage of related debt service. Gross auxiliary revenues totaling \$204.3 million in fiscal 2014 covered pro forma MADS (\$35 million) by a strong 5.8x. Coverage on an economic basis using net auxiliary revenues of \$49.5 million resulted in still sound coverage of 1.4x. Moreover, auxiliary revenues have increased by nearly half since fiscal 2007, largely as a result of enrollment growth and new and expanded facilities.

Auxiliary revenues are primarily derived from athletics, housing, parking and transportation, the student union, student health center, and university stores, although athletics and housing make up about three-quarters of the total.

CAPITAL PLANNING AND SUPPORT

LSU's facility planning includes detailed, multiyear financial projections of debt-financed projects, which are expected to be self-supported. Moreover, management makes timely, related fee increases to support increased debt service costs. A new student recreation project is expected to add \$4.7 million to fiscal 2016 auxiliary revenues.

The university's debt burden created by auxiliary revenue bonds remains manageable. Pro forma MADS represents a moderate 4.35% of fiscal 2014 operating revenues, which is in line with prior years. The state's historical funding of academic and research buildings benefits debt ratios.

LSU plans up to \$146 million of additional auxiliary revenue bonds over the next two years for housing projects and a student health center expansion. Auxiliary revenues are expected to grow commensurate with the debt.

ACTIVE FINANCIAL MANAGEMENT

LSU has managed an extended period of state funding reductions through tuition and fee increases, expense controls, and continued enrollment growth. LSU's state general fund appropriations have fallen by more than one half since January 2009. Moreover, the Governor's fiscal 2016 executive budget proposes still more reductions.

LSU's tuition affordability provides flexibility to manage state funding reductions. However, a continued trend of tuition increases that ultimately softens demand could become a broader credit concern. LSU notes that tuition and related fees are currently 24% below the Southern Regional Education Board average of peer institutions. Moreover, the state's basic award under the Taylor Opportunity Program for Students reduces tuition by about three-quarters for 78% of entering freshman. Tuition and related fees increased by an average of 10.8% annually in the five years to fall 2014, when it reached \$8,750.

LSU's revenue base is fairly diverse, as expected of a flagship public university. Student-generated revenues (tuition, fees, and auxiliary revenues) represent the largest funding source at 55% of fiscal 2014 operating revenues, up from 42.3% in fiscal 2010 for the reasons noted. Grants and contracts and state appropriations represent the second and third largest funding sources at 20.5% and 16.4%, respectively.

MIXED FINANCIAL PROFILE

LSU's operating margin on a GAAP-basis remains negative, albeit stable, despite the strength of its pledged auxiliary revenues. The margin was -2.1% in fiscal 2014, following -3.5% and -3.2% margins in fiscal years 2012 and 2013, respectively. However, the university's balance sheet provides adequate cushion to manage unexpected revenue reductions or increased costs.

Available funds, defined by Fitch as cash and investments less nonexpendable (and certain expendable) restricted net assets, were little changed in fiscal 2014 at \$444 million. Available funds covered operating expenses (\$822 million) and pro forma debt (\$529 million) by 54% and 84%, respectively. Both ratios are in line with Fitch's AA-rating category medians.

Pro forma debt includes auxiliary revenue bonds (all issued as fully amortizing fixed-rate debt), capital leases, and non-cancellable operating leases. LSU's growing and fairly predictable stream of auxiliary revenues that generate consistently solid debt service coverage, as noted, augment its financial cushion. Moreover, LSU continues to benefit from the support of several legally separate but related foundations not included in available funds ratios: the LSU Foundation and the Tiger Athletic Foundation, which held \$591 million and \$138 million of total cash and investments as of fiscal 2014, respectively.