OREANDA-NEWS. Fitch Ratings affirms its 'A+' rating on approximately $22.5 million series 2013A and taxable 2013B general revenue bonds (GRBs) issued by the Board of Governors of the University of North Carolina (BOG) on behalf of Fayetteville State University (FSU).

Fitch also affirms the 'A' rating on FSU's approximately $20.25 million limited obligation bonds (Student Housing Project), series 2011, issued by the BOG on behalf of FSU.

The Rating Outlook for both issues is Stable.

SECURITY

The GRBs are secured by legally defined available funds of FSU (pledged revenue), including unrestricted general fund balances and auxiliary revenue. Specifically excluded from pledged revenues are state appropriations, tuition and restricted funds. As part of pledged available funds, a dedicated student fee was approved for the student union project.

The series 2011 limited obligation housing bonds are secured by base rental payments made by FSU, payable solely from net project revenues and net dormitory system revenues following the payment of debt service on outstanding general revenue debt.

KEY RATING DRIVERS

STABLE STATE SUPPORT: FSU benefits from stable state (rated 'AAA'; Outlook Stable by Fitch) operating appropriations, which are substantial at about 45% of budget, as well as capital support and system oversight. FSU has a demand niche as both a military- and African-American serving campus, and serves a mix of traditional and non-traditional students.

ENROLLMENT PRESSURES: The enrollment decline in fall 2014 was driven by system-mandated admissions standards that created some operating pressure. Concern is partially mitigated as management expects modest full-time equivalent (FTE) enrollment growth in fall 2015, based on admissions trends to date.

SLIM LIQUIDITY AND OPERATING MARGINS: Factors constraining FSU's 'A+' general revenue rating include relatively low institutional liquidity ratios and a trend of slightly negative operating margins.

ADEQUATE DEBT SERVICE COVERAGE: Debt service coverage generated solely from the series 2011 housing project provides essentially 1.0x debt service coverage. The addition of subordinate funds available from the dormitory housing system supports the rating, as does the system's historically strong occupancy. The 'A' rating is differentiated from FSU's 'A+' general revenue rating due to a narrower pledged revenue stream.

RATING SENSITIVITIES

DEBT CAPACITY: Issuance of additional debt by Fayetteville State University, without commensurate growth in revenues or resources, could negatively affect the rating or Outlook.

STABLE INSTITUTIONAL CHARACTERISTICS: Weakening of FSU's historically favorable state operating and capital appropriation environment, extended enrollment declines or volatility, or weakened institutional operating results could negatively stress the rating.

HOUSING SYSTEM OPERATIONS: Failure to generate positive operations for the entire FSU housing system would trigger a downgrade on the series 2011 limited obligation bonds.

CREDIT PROFILE

FSU is one of 17 institutions of the University of North Carolina system, and is located on a single campus in Fayetteville, in southeastern North Carolina. It is a historically African-American university established in 1867. It also serves a mix of traditional and older, non-traditional students in the region due in part to many active and retired military personnel in the area. Management estimates that over half of students are non-traditional, and that about 21% of students have military affiliations.

Most students are undergraduates (about 88%). FSU offers various graduate degrees, a doctorate in educational leadership, and several certificate programs. Enrollment in fall 2014 was 5,135 FTE, down 3.5% from 5,325 in fall 2014.

Pressured Enrollment

FSU's FTE enrollment had stabilized and grown slightly to 5,325 by fall 2013. However, due to UNC-mandated admissions standards, FTE dropped 3.5% in fall 2014 to 5,135. Most of this was in part-time undergraduate and graduate enrollment. Overall FTE enrollment, however, remains well below the 6,700 level seen in fall 2006. Management reports that admissions and deposits for fall 2015 are well ahead of prior year levels, and a modest enrollment increase is expected.

Slim Operating Margins

FSU's operating margin is typically negative or close to break-even on a full accrual basis. For the fiscal year ending June 30, 2014, the operating margin was negative $703,000, a margin of negative 0.6%. Similar results are expected in fiscal 2015. This compared to positive $674,000 (9.6%) in fiscal 2013, and negative $3.2 million (-3%) in fiscal 2012. On a cash basis (before depreciation expense), operations are typically balanced.

Institutional debt service coverage slimmed after issuance of the series 2013AB bonds, and was 1.2x in fiscal 2014. MADS coverage at the same time was about 1.1x. Fitch's expectation for public colleges and universities is at least break-even operating performance on a full accrual basis.

FSU's revenue diversity reflects strong state operating support, which Fitch considers a credit strength. In fiscal 2014, state appropriations represented a substantial 45% of operating revenues, followed by 26.5% grants and contracts (much of which are scholarship and loan funds) and 25% from student fees. Fitch believes FSU enrollment and operations remain vulnerable to eligibility changes in federal grant and loan programs.

State operating appropriations have remained stable in recent years. The fiscal 2016 appropriation has not been finalized as the state budget has not yet been adopted. However, management expected the appropriation to be $49.3 million, up slightly from $48.8 million in 2015 and $49.7 million in fiscal 2014.

Slim Balance Sheet

FSU's available funds ratios, defined by Fitch as cash and investments less restricted assets, remain quite slim for the rating category. Available funds totaled $33 million in fiscal 2014 but after adjustment for unspent bond proceeds were closer to $13 million. This equaled a slim 12% of fiscal 2014 operating expenses and 19.6% of debt (about $67 million at Aug. 1, 2015). Fitch considers these balance sheet ratios very weak for the rating category. Further declines in liquidity would cause a negative rating action.

University Debt

Outstanding debt at the end of fiscal 2014 was $68.9 million, and is estimated at $67 million at Aug. 1, 2015. This includes the $20.2 million series 2011 limited obligation housing bonds, the $22.5 million series 2013AB general revenue bonds, and various capital leases and North Carolina System Pool revenue bonds. It also includes $12.1 million of variable rate housing bonds issued by the FSU Foundation. All university-issued debt is serial fixed rate with the exception of the foundation bonds, which are hedged variable rate demand bonds with a bank credit facility.

Institutional MADS debt burden in fiscal 2014 was favorable at about 4.4% of operating revenues, which Fitch considers to be moderately low. FSU has no plans to issue additional debt at this time.

Housing System
FSU's housing system (including foundation-sponsored housing) provides about 1,600 beds, and houses about 25% of university students. The system has historically reported strong occupancy rates, averaging 98% over the past five years, which are a credit strength. Pledged debt service coverage on the series 2011 bonds was 1.8x in fiscal 2014. However, Fitch does not view pledged coverage as meaningful because the calculation includes housing revenues but not housing system expenses. On an unaudited basis, the entire housing system generated about 1.1x coverage in fiscal 2014, with similar performance projected for fiscal 2015.

The lien on the series 2011 dormitory system revenue bonds is closed. Bond covenants include a debt service reserve initially funded at 50% of maximum annual debt service. If the debt service coverage ratio is less than 1.10 times (x) in any year (using the pledged coverage calculation), the debt service reserve fund will increase to about maximum annual debt service.

Series 2013AB General Revenue Bonds

The bonds carry an 'available funds' pledge, which pledge includes significant dormitory revenues. However, FSU expects dedicated student fee receipts will pay debt service. To support debt service on the student union project, the BOG approved a student fee that has been collected since fiscal 2012. The rate increased from $285 per student per year to $315 effective fiscal 2014, and additional increases become effective in fiscal 2016 ($325) and fiscal 2016 ($335).

The fee can only be used for the student union project and related debt. Management indicates that dedicated fees are reviewed annually as part of the budget process, and no student vote or approvals are needed to increase the fee. Due to an increasing debt service structure, fee receipts in fiscal 2015 ($1.25 million, excluding $750,000 received from FSU's food service operator) remains less than MADS ($1.87 million in 2043). Fitch will continue to monitor the sufficiency of fee receipts relative to debt service, and notes that the FSU pledged 'available revenues' drives the rating.