OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB' long-term rating on approximately \$7.52 million of outstanding series 2006 auxiliary revenue bonds issued by Linn State Technical College, which was renamed State Technical College of Missouri (STCM) as of July 2014.

The Rating Outlook remains Negative.

SECURITY
The bonds are special obligations of the college payable solely from net auxiliary system revenues, including dining facilities, bookstore, residence halls, commons building and activity center (pledged revenues). A cash-funded debt service reserve fund equal to maximum annual debt service (MADS) has been established.

KEY RATING DRIVERS

NEGATIVE OUTLOOK: STCM's Negative Outlook remains in effect until the college demonstrates prudent budget management practices and stability in meeting covenants required under the bond documents.

ADEQUATE COVERAGE: The college reports that the auxiliary system adequately exceeded its annual rate covenant requirement of 1.25x in fiscal 2014 at 1.41x after weaker coverage in fiscal 2013 of 1.26x. Fitch noted non-compliance in fiscal 2013 prior to auditor adjustment. Management expects coverage to remain stable in fiscal 2015.

UNCERTAIN ENROLLMENT MANAGEMENT: STCM's Fall 2014 (fiscal 2015) headcount dipped 2.7%, but was partly offset by an increase in credit hours, with a 6.6% increase in FTE enrollment. According to management, tuition revenues are budgeted based on prior year's average credit hours. The increase in credit hours is due in part to growth in non-traditional (high school student) enrollment which may not be sustainable.

IMPROVED FINANCIAL CUSHION AND OPERATIONS: STCM's limited balance sheet resources have grown significantly (17.2% in fiscal 2014), while the college's operating margin, driven by student-generated revenues, also improved (3.1% in fiscal 2014).

RATING SENSITIVITIES

ADEQUATE PLEDGED REVENUES: A return to a Stable Outlook is predicated on the college's ability to generate sufficient net cash flow from the auxiliary system to meet the 1.25x coverage requirement on a consistent basis.

ADDITIONAL AUXILIARY DEBT: Issuance of additional system debt, without a commensurate increase in pledged revenues available for repayment, could diminish coverage levels and negatively affect the rating.

OPERATING PERFORMANCE: Management's inability to implement effective cost control measures, coupled with a material shift in enrollment-related revenue or state support, could negatively influence operating performance.

CREDIT PROFILE

Founded in 1961, STCM is a two-year, publicly-supported vocational and technical school with its main campus located in Linn, Missouri (the state's general obligation bonds are rated 'AAA' by Fitch). STCM is an open-enrollment institution and the only state-supported, post-secondary technical educational center in Missouri. The college offers advanced technical education in both traditional and emerging technologies and supports economic development in the state.

AUXILIARY SYSTEM DEBT

The system comprises the cafeteria, bookstore, housing, and activity center. The college's total long-term debt outstanding is composed entirely of system debt, \$8.57 million, producing a moderately low MADS burden of 3.7% (based on unrestricted operating revenues of \$22.4 million). Positively, combined net income of the college covers system MADS (\$838,000 in 2024) by a strong 4.4x. While the college expresses a willingness to support system debt service from consolidated resources, if necessary, there is no legal requirement to do so. Further, no additional debt issuance is expected in the near term, which reflects positively on STCM's overall leverage ratios.

IMPROVED ALTHOUGH UNPROVEN SYSTEM CASH FLOW

The bond rate covenant requires that STCM generate net auxiliary revenues at least equal to 1.25x system ADS.

STCM reports compliance with the bond document covenant with improved coverage in fiscal 2014 at 1.41x, after achieving 1.26x coverage in fiscal 2013, per recent certification received from management. The Fiscal 2013 rate covenant certification reflects a prior period adjustment and re-classification of deferred revenues, which had resulted in the understatement of net revenues for the auxiliary system before the adjustment.

Fitch calculates the rate covenant based on auxiliary system audited net cash flows provided by operating activities to annual debt service which is slightly lower at 1.34x and 1.20x in fiscal 2014 and 2013, respectively.

The Negative Outlook reflects Fitch's uncertainty regarding management's ability to budget effectively to maintain coverage at current levels. Management expects to exceed the rate covenant in fiscal 2015 despite lower than budgeted tuition revenues, due to the use of contingency funds.

NICHE PROGRAMS DRIVE DEMAND

STCM fills a distinctive niche in post-secondary education in the state, offering technical education with a focus on job obtainment upon graduation. Fall 2014 FTE enrollment reached a record high of 1,354 students, despite headcount enrollment dipping 2.7% in Fall 2014. This decline is due in part to a statewide decline in high school graduation rates. While the decrease in STCM's Fall 2014 headcount is of concern, the significant 6.6% uptick in FTE enrollment is somewhat of a mitigant. Some uncertainty exists around ability to maintain credit hours at current levels, and the rating is based on the ability to maintain stability in the level of credit hours.

As of April 2015, the college received 193 less applications for Fall 2015 compared to the same time in the prior year. Fitch is uncertain as to how this trend will ultimately impact overall enrollment for Fall 2015.

SMALL BUT DIVERSIFIED OPERATIONS

In fiscal 2014, there was a 2% increase in state appropriations (comprising 20.4% of total revenue, down from 21.6% of revenues in fiscal 2013), followed by a 5% increase in 2015. Student fees (tuition and auxiliary revenues), representing 43% of total revenue, were augmented by an 11.8% increase in net tuition and fees, which is largely the reason for the improved 2014 operating margin (3.1% vs. the five-year average of -0.6% in fiscal 2010-2014).

Fitch continues to stress that STCM will need to manage expenses, including those associated program expansion, which the college views as necessary to attract new students. An inability to implement effective cost control measures, coupled with a material shift in enrollment-related revenue or state support, could negatively impact the college's operating performance.

CUSHION CONTINUES TO IMPROVE

The college's available funds (AF), or cash and investments less non-expendable restricted net assets, provide a fairly limited financial cushion, although it grew by a healthy 17.2% to \$9.02 million in fiscal 2014. While not pledged, this growth of available funds is viewed favorably, with AF representing 41.5% of operating expenses and a healthier 105.3% of long term debt.