OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB' rating on North Carolina Capital Facilities Finance Agency's approximately \$16.2 million of series 2012 revenue bonds issued on behalf of Methodist University (MU).

The Rating Outlook is Stable.

SECURITY

MU's obligations pursuant to a loan agreement with the issuer are a general, unconditional obligation payable from all legally available university funds. MU secures its obligations under the agreement with a mortgage interest in its core campus.

KEY RATING DRIVERS

SMALL PRIVATE UNIVERSITY: MU is a small, private liberal arts university serving a diverse student base from expanding academic programs in health sciences and proposed in engineering.

POSITIVE OPERATING PERFORMANCE: Positive operations support healthy debt service coverage levels. Margins have averaged nearly 5% annually since fiscal 2010, including slightly weaker results in fiscal years 2013-2014 and expected in fiscal 2015.

LIMITED FINANCIAL CUSHION: Liquid resources provide somewhat limited financial cushion to absorb operating margin compression or capital spending associated with academic program expansions. The ratios of available funds to fiscal 2014 operating expenses and pro forma long-term debt equaled 39.8% and 47%, respectively.

PROGRAM DEVELOPMENT DRIVES ENROLLMENT: A newly instituted strategic plan positions the university to potentially continue enrollment growth through new program offerings. Full-time equivalent enrollment growth has averaged 3.3% annually since fiscal 2010 to 2,312 in fiscal 2015, including recent unevenness, and preliminary fiscal 2016 admissions remain favorable.

HIGH DISCOUNTING: Aggressive tuition discounting topping 40% in fiscal 2015 could challenge revenue growth, as revenue sources are highly concentrated in student fees. Nevertheless, net tuition and fees have grown by about one-third since fiscal 2010 through a combination of enrollment and moderate tuition increases.

RATING SENSITIVITIES

MARGIN COMPRESSION: Stalled net tuition and fee revenue growth - either by flat enrollment or aggressive discounting - could lead to negative rating action on Methodist University, given the costs of new academic programs and the more limited cushion provided by available funds.

DEBT ACCELERATION: Provisions guiding the acceleration and remedies of MU's series 2014 direct placement pursuant to the events of default could add downward rating pressure. The university plans to amend these provisions in the near term.

CREDIT PROFILE

MU, located in Fayetteville, North Carolina, was founded as Methodist College in 1956, initiated operations in 1960 and graduated its first class in 1964. The university's regional accreditation with the Southern Association of Colleges and Schools Commission on Colleges was most recently reaffirmed in 2009 for a 10-year term.

The university serves a diverse set of traditional residential students, commuters, and military personnel from the nearby Fort Bragg, as well as evening and part-time students. Active duty and related students represent approximately 20% of total headcount enrollment, which presents some exposure to shifts in associated federal benefits.

GROWTH MODE

MU is in a growth mode that positions it to potentially build on enrollment trends and bolster its financial position. New health sciences and proposed engineering programs serve as the catalyst for expected 3.5% annual growth in headcount enrollment to a goal of 3,000 by fall 2020 from 2,461 in fall 2014. This appears consistent with historical growth rates, despite some year-to-year unevenness. The fall 2013 and 2014 incoming freshmen classes were among the largest in the university's history.

New academic programs will require faculty and facility investments that present a degree of financial risk if enrollment fails to materialize, given narrower operating margins in recent years and the somewhat limited cushion provided by available funds. The university anticipates strong student demand to offset the risk of these associated up front investments. Improving student retention to nearer 70% annually through ongoing efforts from an average of 59% over the past five years is critical to the success of the plan.

ADEQUATE FINANCIAL POSITION

A mixed financial position includes healthy cash flows and modest financing plans countered by limited financial cushion, as noted. Operating margins have averaged 4.9% annually since fiscal 2010, including 1.9% and 2.3% in fiscal years 2013 and 2014, respectively. Tighter margins in recent years result, in part, from increased student aid to bolster enrollment. Gross tuition and fees grew by 44% from fiscal 2010-2014, while student aid grew by 57% during the same period.

MU's fiscal 2015 six-month interim results indicate a weaker, albeit still positive, margin than the prior full year. Total headcount enrollment remained flat and the discount rate increased to 41.8%, as planned. A projected 6.2% increase in student charges provides some offset.

Positive operating performance is integral to rating stability, given expected faculty and facility investments and the university's more limited balance sheet flexibility. Available funds equal just 39.8% and 47% of fiscal 2014 operating expenses and pro forma long-term debt, respectively, despite having increased by one-half since fiscal 2010 to \$19.8 million in fiscal 2014. The retention of annual operating surpluses to pursue capital plans has supported available funds growth.

POTENTIALLY LIMITED PRICING FLEXIBILITY

The university's tuition flexibility appears somewhat limited, as evidenced by increased student aid. Nevertheless, tuition has begun to slowly increase, and MU plans to reduce the discount rate, in part, to generate additional revenues in support of strategic initiatives.

Fiscal 2014 tuition discounting increased to 39% from 35.7% the prior year, reflecting recruitment efforts and market trends. The projected fiscal 2015 yearend discount rate increases still more to 41.3% compared with MU's targeted rate of 40%. Planned graduate programs, which are not discounted, should yield additional revenues over time.

MANAGEABLE CAPITAL PLANS

Manageable capital plans principally address new program offerings. MU is adding new health sciences, arts, student center, and athletic facilities over the next several years largely without debt financing. The university is 97% through a \$35 million capital campaign scheduled to end next year. The only planned debt is \$5 million within the next 2-3 years.

A third-year housing requirement effective fiscal 2016 should provide additional financial benefit. MU estimates that housing capacity was 94% in 2014 and is trending nearer 100% with the new requirement. However, no new housing projects are currently planned for the next two to five years, and management notes that rental units would precede new housing construction.

INTEREST RATE EXPOSURE

The university faces some interest rate exposure on its unhedged variable rate debt, absent sizable liquid reserves. Outstanding debt totals approximately \$36.6 million, including series 2012 fixed rate bonds (\$16.2 million) and series 2014 VRDBs (\$22.6 million, not rated).

The series 2014 parity obligations were a direct placement to refund series 2005 VRDBs and provide \$4.5 million of financing for the new health sciences building. As with the series 2005 bonds, MU maintains two floating- to fixed-rate swaps on 50% of the par amount. The swaps have no rating triggers or collateral posting requirements, which limits financing risks.
MU expects to amend the continuing covenant agreement to add a 180-day cure period before the bank can accelerate payment in the event of a default, which would allow MU some time to address related issues.

A track record of good MADS coverage (1.7x in fiscal 2014) mitigates the university's moderate pro forma MADS burden of 6.7%. Current debt service coverage for fiscal 2014 was a stronger 2.3x.