OREANDA-NEWS. Fitch Ratings affirms its 'A' rating on various revenue bonds issued by the Illinois Finance Authority (IFA) on behalf of DePaul University (DePaul). A complete list of rating actions follows at the end of this release.

The Rating Outlook is Stable.

SECURITY
The bonds are an unsecured general obligation of the university.

KEY RATING DRIVERS

RELATIVELY STABLE FINANCIAL METRICS: The 'A' rating reflects DePaul's history of positive operations, sound balance sheet resources for the rating category, and active expense management. However, enrollment for graduate, law and undergraduate transfer students has declined in recent years, which is a concern.

PROACTIVE MANAGEMENT: The university has effectively managed operations despite the stressed enrollment cycle. Fiscal 2014 results, when adjusted for a one-time early retirement expense, were positive, and management projects similar results for fiscal 2015.

MANAGEABLE DEBT BURDEN: DePaul's maximum annual debt service (MADS) burden was 5.7% of fiscal 2014 operating revenues. This moderate to moderately high MADS burden is mitigated in part by rapid principal amortization and a conservative fixed rate debt structure.

RATING SENSITIVITIES

ENROLLMENT PRESSURES: DePaul's high reliance on student derived revenue requires strong management of enrollment and expenses to maintain positive operating results. Solid balance sheet reserves provide operating cushion, but over time Fitch expects enrollment to stabilize.

OPERATING DEFICITS: Declines in DePaul's operating performance and debt service coverage - compounded by failure to grow net tuition revenue - would negatively pressure the rating.

ADDITIONAL DEBT: Fitch will monitor new debt plans relative to expenses and resources. The university has some additional debt capacity at the current rating.

CREDIT PROFILE
Founded in 1898, DePaul is a private non-profit institution, and one of the largest Catholic universities in the U.S. DePaul has large campuses in Chicago's Loop business district and the Lincoln Park neighborhood of Chicago. There are also three leased suburban satellite campuses, one of which is scheduled to close at the end of fiscal 2015.

DePaul is a co-educational institution offering extensive undergraduate and graduate degree programs. In fall 2014, about 76% of the 20,667 full-time equivalent (FTE) students were undergraduates. Large professional and graduate programs include law, business, computing and digital media, nursing, and education. Management reports that about 10% of credit hours are delivered on-line. The university's student draw remains regional, with new freshman undergraduate students coming primarily from Illinois and the Chicago metropolitan area (about 63%).

ENROLLMENT VOLATILITY AND GRADUATE DECLINES
Total FTE enrollment for fall 2014 (fiscal 2015) was 20,667, a decline of 2.4% since fall 2010, and a decline of about 1% between just fall 2013 and 2014. Management reports that fall 2014 enrollment declines were anticipated, and enrollment is above budget expectations for the current year. Additionally, non-traditional and graduate enrollment strengthened later in the year. Much of the volatility has been in law school enrollment, which has followed national trends. Fall 2014 law school head-count was 802, down about 25% from 1,076 in fall 2010. Fitch views this decline as a concern, although mitigated in part by management reports that the law school is operating within budget.

Graduate enrollment has also been impacted, particularly business and education programs that attract older non-traditional students; declines are somewhat consistent with national trends and economic cycles. Other graduate programs, such as computing and digital media and health sciences, have increased enrollment. Fall 2014 FTE graduate enrollment was 5,003 (including law), down from 5,851 in fall 2010, reflecting a 14% decline.

Full-time undergraduate students remain a strength in DePaul's enrollment picture. These students represent a substantial portion of enrollment (about 57% of total university 23,799 headcount in fall 2014), and this segment has grown a modest 3% in recent years (from 13,250 in fall 2010 to 13,643 in fall 2014). Part-time undergraduates, which include a sizable commuter and transfer population, were stable at about 2,800 students, but dipped to 2,500 in fall 2014. Management reports that there is increased competition for transfer students in the already competitive Chicago metropolitan market.

OPERATING MARGINS OFFSET TUITION DEPENDENCY
DePaul has consistently generated positive operating margins, including fiscal 2014 as adjusted by Fitch. While the margin has narrowed in recent years, the university still produces healthy surpluses. However, fiscal 2014 operations were a negative \$1.78 million (negative 0.3% margin) due to a one-time early retirement incentive expense of about \$23 million. When adjusted for that expense, DePaul would have generated an approximate \$21.2 million surplus (about 3.8% operating margin). Management reports that all incentive expenses were recorded in fiscal 2014.

The operating surplus for the fiscal year ending June 30, 2015 is projected to be in the \$20-\$22 million range, returning to more typical levels. Management reports that expense controls continue, particularly given recent enrollment fluctuations in graduate and professional programs. These include giving merit awards instead of base salary increases, budgeting conservatively, using operating contingencies, and strategically not filling vacant positions.

Given DePaul's high student fee dependency (92.4% of 2014 unrestricted operating revenues) and recent enrollment volatility, Fitch views maintenance of the university's positive operating margin as critical in supporting the 'A' rating.

STABLE LIQUIDITY
The university's balance sheet remains solid for the rating category. Available funds (AF), defined by Fitch as unrestricted cash and investments, was \$588 million at the end of fiscal 2014, equal to a healthy 105% of operating expenses and 168% of outstanding debt. When projected new debt of \$82.5 million in fiscal 2016 or 2017 is included, the AF-to-debt ratio remains solid at 141%. DePaul's endowment and other investments have a somewhat conservative asset allocation, with less than 18% in alternative assets.

The university has a history of designating reserves for future capital projects, a practice that Fitch views as conservative. At the end of fiscal 2014, board-dedicated reserves were about \$55 million, and excluded a subsequent board designation of \$20 million. These (and other reserves not specifically board-designated) are included in Fitch's AF valuation, though the level could be reduced if drawn on for a specific project. In addition, the university completed a comprehensive capital campaign in mid-2014, raising \$333 million, well above its initial goal. At this time, Fitch views DePaul's financial cushion as solid for the rating level.

MANAGEABLE DEBT AND CAPITAL PLANS
Outstanding debt at June 30, 2014 was \$349 million, including \$282 million parity bonds, and various mortgage notes and leases. The university's debt structure is fixed rate and front loaded with rapid principal amortization. Fitch views this structure favorably, and notes that it provides additional debt capacity.

In addition to a planned refunding for savings, DePaul expects to issue up to \$82.5 million of taxable bonds in fiscal 2016 or fiscal 2017 for its contribution to an events center facility. The facility would be owned by the Metropolitan Pier and Exposition Authority, which operates the McCormick Place convention center south of the Loop business center. Management reports that the university would have naming and scheduling rights, long-term access to seating, but would not have operating liabilities. The facility is expected to have access to mass transportation that is convenient to students at both the Lincoln Park and Chicago Loop campuses. At this time, assuming continued operating surpluses, Fitch views the university as having debt capacity for this project at the current rating level.

Existing MADS (\$32 million in fiscal 2015) was about 5.7% of fiscal 2014 operating revenues, a level Fitch considers moderate to moderately high, but manageable due to rapid debt amortization. Pro forma debt burden including the proposed events center project (roughly \$35.6 million) increased to about 6.4%, still a manageable level.

MADS coverage for DePaul remained solid in fiscal 2014. It was 1.6x without an adjustment for non-recurring retirement expenses, and 2.3x after adjustment. Including projections for the events center project, fiscal 2014 pro forma MADS coverage is estimated at 2.1x, still a solid coverage level.

Fitch affirms the following ratings issued by IFA bonds on behalf of DePaul University:

\$24.57 million DePaul University rev refunding bonds series 2004A, rated 'A';
\$21.435 million DePaul University rev refunding bonds series 2005A;
\$39.085 million DePaul University rev bonds series 2008, rated 'A';
\$115 million DePaul University rev refunding bonds series 2011A rated 'A';
\$44.815 million DePaul University rev refunding bonds series 2011B rated 'A';
\$31.78 million DePaul University rev refunding bonds series 2013 rated 'A'.