OREANDA-NEWS. Fitch Ratings assigns an 'AAA' rating to the following series of bonds to be issued by or on behalf of Northwestern University (Northwestern, or the university):

--\$500 million Northwestern University, taxable fixed rate bonds, series 2015;
--\$116.3 million Illinois Finance Authority (IFA) revenue bonds, Northwestern University, series 2015.

The series 2015 taxable bonds are expected to sell via negotiation the week of April 27 and the series 2015 IFA bonds are expected to sell via negotiation on May 19. Proceeds of the series 2015 bonds will be used to finance various capital projects at Northwestern's Evanston and Chicago campuses, refund the university's \$145.1 million of currently outstanding series 2006 IFA revenue bonds, and to pay associated costs of issuance.

In addition, Fitch affirms Northwestern's various long- and short-term ratings as detailed at the end of this release.

The Rating Outlook is Stable.

SECURITY

Revenue bonds and commercial paper (CP) constitute an unsecured general obligation of Northwestern, payable from all legally available funds.

KEY RATING DRIVERS

STRONG, STABLE FINANCIAL PROFILE: The 'AAA' rating is primarily supported by Northwestern's substantial level of balance sheet resources; consistently positive operating results driven by a diverse revenue base and strong fundraising ability; and a manageable pro forma debt burden.

IMPRESSIVE STUDENT DEMAND METRICS: The university's renowned reputation in academics and sponsored research continues to drive its strong student demand, demonstrated by growing freshmen application volume and highly selective admissions at both the undergraduate and graduate level.

MANAGEABLE DEBT BURDEN: A growing and diverse revenue base has enabled Northwestern to maintain a manageable pro forma debt burden, despite growing financial leverage from the periodic issuance of debt to fund its large, multi-year capital plan. Fitch believes the high pro forma debt burden that results from the use of bullet maturities is mitigated by the university's considerable financial cushion.

SUFFICIENT LIQUID RESOURCES: Northwestern has the ability to cover the maximum potential liquidity demands presented by its variable-rate debt programs by 2x from internal resources. Such resources include cash and highly liquid, highly rated investments.

RATING SENSITIVITIES

FINANCIAL MARKET VOLATILITY: Material erosion to Northwestern's strong financial cushion and/or a material decline in operating performance, which depends in part on annual endowment distributions, while not currently anticipated, could pressure the rating.

EXTERNAL FUNDING SOURCES: Similar to other comprehensive graduate research universities, Northwestern remains exposed to reductions in federal research funding. Federal grants and contracts generally account for about one-quarter of the university's total unrestricted operating revenue.

CREDIT PROFILE

Founded in 1851, Northwestern is a private comprehensive university with campuses in Evanston, Chicago, and Doha, Qatar. Fall 2014 full-time equivalent enrollment of 16,096 was nearly flat with the prior fall term and up a modest 2.6% since fall 2009. The university's reputation is the basis for its highly selective demand characteristics. Its fall 2014 freshman acceptance rate improved to 13.1%, with a solid 46.3% of accepted students choosing to enroll. As application volume continued to grow over the past several years, demand metrics steadily improved; the freshman acceptance rate stood at 27.1% as of fall 2009. Based on preliminary data, Northwestern registered a low 13% acceptance rate based on 32,124 freshmen applications received for the fall 2015 term.

Northwestern's prestigious graduate programs, including the Kellogg School of Management; McCormick School of Engineering and Applied Sciences; and Feinberg School of Medicine, which is part of the McGaw Medical Center consortium, maintain similarly selective admissions and account for half of the university's total enrollment base.

STRONG AND STABLE FINANCIAL PROFILE

Northwestern's healthy demand trends and diverse revenue base enable it to generate a consistently positive operating margin. The operating margin, inclusive of endowment spending, was a strong 16.3% in fiscal 2014 (fiscal-year-end Aug. 31), exceeding the 8.8% average of the prior five fiscal years (2009-2013). Fiscal 2014 performance was boosted by some large one-time gifts associated with the university's recently launched comprehensive fundraising campaign.

Fitch notes positively that even before endowment distributions, the university's margin has generally been breakeven to positive, averaging 1.8% over the past five years (or 0.4% when excluding fiscal 2014). This is unlike some other 'AAA' rated colleges and universities that generally have steep deficits before endowment support. Based on year-to-date performance, management anticipates another strong operating result for fiscal 2015, although the operating margin will likely be closer to the 8%-9% range experienced in fiscal years 2013 and 2012.

Student-generated revenues, which include tuition, fees and auxiliary receipts, are the university's largest funding source, making up 26.5% of unrestricted operating revenues in fiscal 2014. Other significant funding sources include grants and contracts related to its robust sponsored research activities and investment income, representing 23.2% and 11.8% of revenues, respectively. Gifts and contributions contributed 19.8% to operating revenue, although this was elevated from prior years due to the significant gift revenue received in fiscal 2014.

BALANCE SHEET CUSHION REMAINS STRONG

Substantial balance sheet resources remain a primary credit strength of the university. Available funds (defined as cash and investments not permanently restricted) grew to \$9.12 billion as of Aug. 31, 2014, up 20.6% from fiscal-year-end 2013 and up a substantial 71% since fiscal 2010. Available funds growth is attributed to favorable investment returns, fundraising success and monetization of the university's royalty interests in the pharmaceutical drug Lyrica. Available funds covered fiscal 2014 operating expenses (\$1.97 billion) and pro forma debt (about \$1.88 billion) by a healthy 462% and 485%, respectively.

Typical of well-endowed private institutions, Northwestern maintains considerable exposure to alternative, illiquid asset classes, at approximately three-quarters of its investment portfolio. Concern over this level of exposure is partly offset by the fact that these alternative assets are held for long-term purposes and not relied upon as a source of liquidity by the university. Excluding these assets from available funds, the university still maintains over 1x coverage of operations and pro forma debt.

MANAGEABLE DEBT BURDEN OFFSETS SIZEABLE CAPITAL PLAN

Following issuance of the series 2015 bonds, Northwestern will have about \$1.88 billion in debt outstanding, including revenue bonds (\$1.66 billion), CP notes (\$120 million currently outstanding) and non-cancellable operating leases (\$98 million as of Aug. 31, 2014). Post issuance, Northwestern's debt structure will be fairly conservative, with about 86% and 14% of revenue bonds in fixed- and variable-rate mode, respectively. About half of all variable-rate bonds remain synthetically fixed via three interest rate swaps.

The university's pro forma debt burden based on fiscal 2014 operating revenues and pro forma maximum annual debt service (MADS) of an estimated \$224.6 million (occurring fiscal 2035) is high at 9.5%. Despite the inclusion of a bullet maturity, Fitch notes that Northwestern still generated sufficient pro forma maximum annual debt service (MADS) coverage of 2.4x based on fiscal 2014 net operating income. Even in prior years, with less strong gift revenue, Northwestern would still have been able to cover pro forma MADS by more than 1x.

As MADS includes a large bullet payment, Fitch also analyzed the debt burden based on average annual debt service (AADS). AADS of about \$93.3 million results in a moderate 4% debt burden. Use of non-level amortization schedules is typical for highly rated institutions, especially those with significant resources. Fitch expects Northwestern will utilize its considerable resource base and market access to address bullet payments prior to maturity.

Northwestern continues to have robust capital plans, with about \$2.7 billion worth of potential projects either under construction, being planned, or being studied over the next several years. The capital plan addresses a variety of academic, athletics, housing and infrastructure-related needs. The university typically funds capital projects through a mix of gifts, grants, internal resources and debt, including the series 2015 issuance. The large size of the capital plan is partially mitigated by the university's exceptional financial flexibility and management's prudent facilities planning and debt management practices, including identifying appropriate funding sources prior to commencing projects. Moreover, the university recently launched a \$3.75 billion comprehensive fundraising campaign, a portion of which is designated for capital.

INTERNAL LIQUIDITY SUPPORTS SHORT-TERM DEBT OBLIGATIONS

As of March 31, 2015, Northwestern's liquid investment pool, consisting of cash, cash equivalents and U.S. Government securities, had a balance of \$1.09 billion (after discounts based on asset type and maturity per Fitch's short-term rating criteria). These liquid assets would cover the university's full \$300 million of authorized CP (\$120 million currently outstanding) and \$260.8 million of weekly resetting adjustable-rate revenue bonds by a solid 1.94x, exceeding the 1.25x coverage Fitch typically expects for an 'F1+' rating.

To limit potential calls on its liquidity, Northwestern restricts the amount of CP notes that may come due on any given day to \$50 million. In addition, the university has access to general purpose bank lines of credit with a combined limit of \$300 million. While these lines of credit are not dedicated solely to a failed remarketing, they are available to the university for same-day funding. Northwestern's detailed procedures for managing a failed remarketing of adjustable-rate revenue bonds and/or rollover of CP notes are regularly updated, reflecting favorably on management.

Fitch affirms the following ratings:

--\$786 million Northwestern University, taxable fixed rate bonds at 'AAA';
--\$145.1 million IFA revenue bonds, series 2006 at 'AAA' (being refunded);
--\$260.8 million IFA adjustable-rate revenue bonds at 'AAA/F1+';
--\$300 million taxable CP program at 'F1+'.