OREANDA-NEWS. Fitch Ratings has affirmed the 'AA' rating on the following University of South Carolina (USC) revenue bonds:

--\$226 million higher education revenue bonds;
--\$62 million special higher education revenue bonds.

The Rating Outlook is Stable.

SECURITY

Higher education revenue bonds are secured by student and faculty housing, parking, and bookstore facility net revenues. The bonds are additionally secured by all legally available, unencumbered university funds and academic fees, excluding state appropriations and tuition revenues pledged to state institution bonds. The bonds are parity obligations of the outstanding special higher education revenue bonds.

KEY RATING DRIVERS

FLAGSHIP INSTITUTION: USC benefits from solid demand trends as the state's flagship institution of higher education. Increasing application volumes and steady undergraduate student enrollment growth offset slower growing graduate enrollment in recent years.

STABLE LONG-TERM TRENDS: The historically consistent generation of operating surpluses fueled by enrollment gains and a fairly diverse revenue base; adequate balance sheet resources; and manageable financial leverage continue to underpin the university's 'AA' rating.

RECENT SOFTNESS: Tighter operating margins since fiscal 2012 and a slight weakening of available funds ratios are not a rating concern. The change reflects a planned, growth-related strategy through fiscal 2016.

STABILIZED STATE FUNDING: Modest increases in fiscal years 2013-2015 state appropriations highlight the university's improved overall revenue stability, following a nearly 50% cut in total state funding from fiscal years 2008-2012.

MANAGEABLE DEBT BURDEN: A moderate pro forma maximum annual debt service (MADS) burden and consistently solid debt service coverage provide rating support, despite ongoing capital expenses to fund growth plans.

RATING SENSITIVITIES

ENROLLMENT STABILITY: Adverse enrollment shifts, while not currently anticipated, could strain the university's operating performance and yield negative rating pressure. Student-generated revenues represent USC's dominant funding source.

CREDIT PROFILE

Founded in 1801, USC is an eight-campus system with its principal location in Columbia. The university's 14 degree-granting colleges and schools offer more than 320 degree programs.

SOLID DEMAND TRENDS

As the state flagship, USC's increasing applications and steady enrollment growth evidence solid student demand. Full-time equivalent enrollment grew by an average of 2.6% annually from fiscal 2010-2015, when it reached 43,167. Moreover, fiscal 2016 applications through March 2015 are reportedly up 9% from the same period last year. Undergraduates at the main Columbia campus are the principal growth driver.

Above-average tuition rates suggest more limited pricing flexibility. However, nearly all students receive some type of university or state-funded scholarship that supports demand.

SOUND FINANCIAL OPERATIONS IN TRANSITIONAL PERIOD

USC's financial profile remains sound, despite recent spending trends. The university's \$100 million enterprise resource plan (ERP) principally for finance, student account, and payroll systems contributed to operating margin compression in fiscal years 2013-2014 and will likely cause additional pressure through fiscal 2016; the university is about three-quarters through the plan. New faculty hires to meet growing demand also contributed to tighter margins during the period.

Nevertheless, the fiscal 2014 operating margin remained breakeven and the five-year average is a solid 3.6%. Steady enrollment growth, tuition increases averaging 4.2% annually since fiscal 2010, and various budgetary restraints have provided some offset. In addition, USC began collecting additional revenues for the ERP in fiscal 2005 which boosted margins in prior years.

GOOD REVENUE DIVERSITY

USC's fairly diverse revenue base continues to support overall financial stability, despite a shift in the revenue mix over several years with lower levels of state funding. Student-generated revenues, including tuition, fees, and auxiliary receipts, grew by an average of 8.3% annually to approximately half of fiscal 2014 adjusted operating revenues. By contrast, state funding declined by 2.6% annually during the same period from 16.6% to 13.2% of the total.

In a favorable turn, the university received modest new state recurring funds in fiscal years 2014 and 2015 for pay package and benefit increases and other initiatives. In addition, fiscal 2016 indications are similarly positive. However, the nearly 50% total state funding reduction from the fiscal 2008 peak (\$230.5 million) to 2012 (\$118.3 million) represents a considerable decline in annual support. Fiscal 2014 total state support was \$144.3 million.

ADEQUATE FINANCIAL CUSHION

USC's balance sheet provides adequate financial cushion. Fiscal 2014 available funds, defined as cash and investments less adjusted non-expendable restricted net assets, declined to \$422 million from \$469 million the prior year for the reasons noted. However, such balances grew by a total of 16.4% since fiscal 2010.

Available funds represented 38.6% of operating expenses and 66.5% of pro forma debt. Both ratios are weaker than Fitch's respective 'AA' medians of 51.2% and 85.6%. However, such ratios exclude related foundations that hold significant funds in support of USC's mission; the University of South Carolina Educational Foundation had \$426 million of fiscal 2014 net assets, up from \$355 million the prior year.

Pro forma debt includes higher education revenue bonds, special higher education revenue bonds, state institution bonds (rated 'AAA'/Stable Outlook by Fitch, based on the state's GO pledge), athletic facilities revenue bonds (not rated by Fitch), and various notes payable and lease obligations. Recently issued off-balance-sheet debt for a privatized student housing project totaling \$92.7 million would reduce available funds ratios slightly to 58% of pro forma debt.

MODEST LEVERAGE

USC's debt burden remains manageable. Total pro forma MADS of \$48.9 million (fiscal 2016) would consume a moderate 4.5% of fiscal 2014 operating revenues. In addition, a conservative debt structure includes only fully amortizing, fixed-rate structures.

A track record of prudently implementing capital projects on-time and on-budget, coupled with the university's ability to generate operating surpluses, should help continue to service debt issued for capital needs. USC's rolling five-year capital plan includes approximately \$670 million of projects. The university completed a new building for the Darla Moore School of Business in August 2014; the \$106.5 million project was the largest in university history.

A considerable capital campaign begun in fiscal 2008 is nearing its \$1 billion goal.

AUXILIARY ENTERPRISES

Net facilities revenues securing the higher education revenue bonds are principally derived from USC's student and faculty housing and parking facilities, and to a lesser extent its bookstore operations at the Upstate campus. The self-supporting housing system continues to perform well, driven by strong occupancy. USC has 6,700 assignable beds and a freshman residency requirement, with occupancy rates approximating 98%-99%.

Net facilities revenues totaled \$24.4 million in fiscal 2014, based on gross revenues of \$58 million. Such revenues covered annual debt service by an adequate 1.35x, exclusive of pledged additional funds balances totaling more than \$700 million.