OREANDA-NEWS. Fitch Ratings has assigned a 'BBB-' rating to approximately $70.32 million of Health, Educational and Housing Facility Board of the City of Chattanooga revenue refunding bonds, series 2015 issued on behalf of the CDFI Phase I, LLC (the project).

At the same time, Fitch affirms the 'BBB' rating on approximately $56.27 million of outstanding senior series 2005A bonds and the 'BBB-' rating on approximately $18.13 million subordinate series 2005B bonds which are both expected to be fully refunded with the series 2015 bond issue.

The bonds are expected to sell by Oct. 21, 2015.

The Rating Outlook is Stable.

SECURITY

The series 2015 bonds are secured by and payable solely from the project revenues consisting of CDFI's phase I, II and III student housing facilities. Additional bond security will include a cash funded debt-service reserve fund equal to maximum annual debt service (MADS). Bonds are non-recourse to the University of Tennessee at Chattanooga's (UTC) and the University of Chattanooga Foundation (the foundation).

The series 2005 bonds that will be refunded are secured by the project revenues consisting of CDFI's phase I, II and III student housing facilities.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'BBB-' rating reflects a history of strong demand for CDFI project housing and adequate coverage of all outstanding debt, with no foundation support needed since fiscal 2009. The risk of the stand-alone project is partially mitigated by the project's essential role in the UTC residential life program and self-supporting nature.

HIGH CONNECTIVITY WITH UTC: All officers of the project are also officers of the foundation reflecting the importance of the project to UTC. The project is managed as part of UTC's 3,161 bed housing system (the system) and represented approximately 55.2% of total available beds in fiscal 2015.

SELF-SUSTAINING PROJECT: The project's self-supporting nature is the result of historically strong occupancy and UTC's prudent management of facility expenses driving adequate coverage (1.3x) of the combined annual debt service based on estimated fiscal 2015 project revenues available for debt service ($7.94 million). Cash flow forecasts reflect similar coverage for fiscal 2016 despite slightly lower occupancy (95%) for fall 2015.

CONSTRAINED FLEXIBITY: Counterbalancing rating factors include very high dependence on student rental payments as the project's primary revenue source and the somewhat limited pricing flexibility given the project's high rates relative to other on campus housing alternatives.

ENROLLMENT DRIVES OCCUPANCY: Historically strong project occupancy and growth in project revenues is the direct result of UTC's stable demand. Tempering enrollment in fall 2015 drives lower, though still strong, occupancy levels due to the State of Tennessee's new Promise scholarship program launched in 2015, providing two-years of tuition-free community college for all first time students.

RATING SENSITIVITIES

PROJECT PERFORMANCE: The inability of CDFI Phase I, LLC to grow rental income and achieve forecasted debt service coverage levels, in the absence of foundation support, could negatively impact the rating.

ADDITIONAL PARITY DEBT: CDFI Phase I, LLC's issuance of additional student housing debt on parity to the series 2015 bonds could have negative rating implications.

FUTURE PROJECT COMPETITION: Demand is presently strong, but competition from new university housing projects or lower enrollment could put pressure on CDFI Phase I, LLC's occupancy levels which would negatively pressure the rating.

CREDIT PROFILE

CDFI Phase I, LLC is a subsidiary of Campus Development Foundation Inc. (CDFI), which was formed by the foundation to acquire real estate and to construct, manage, and operate housing for UTC students on the university's south campus. CDFI constructed the 1,737 bed project in three phases, with the final phase opening in 2004. The south campus' total capacity increased by 15 beds in fall 2015 to 1,749 and is geared primarily to upperclassmen.

PROJECT ESSENTIALITY
UTC manages the project as part of its housing system; however, the UC Foundation sets the project's room rental rates. In Fitch's view, management of the system and the project as a collective whole ensures the project plays an integral role in residential life on UTC's campus and that rates and charges are set competitively. However, UTC does not direct students to this project on a first fill basis. Positively, the project is an essential part of the UTC Housing system, representing approximately 55% of all available housing at UTC in fiscal 2015.

SELF-SUSTAINING PROJECT
The security fund established by the foundation and the annual draw requirement under the original bond documents will be released under the new Master Trust Indenture for the series 2015 financing. The foundation previously provided supplemental support to the overall project, however, since fiscal 2009, these contributions have not been necessary for CDFI to meet the legally required combined debt service coverage ratio on the series 2005 bonds. Ultimately those payments have been returned by CDFI to the foundations, along with year-end surplus funds.

The series 2015 bond covenants require 1.2x coverage of all outstanding project bonds compared to the 1.1x combined coverage requirement under the original bond documents. Further, in any year coverage is less than 1.2x and above 1.0x, any excess cash flow will get trapped by the trustee and a consultant must be retained. Failing to achieve coverage of at least 1.00x for any fiscal year constitutes an Event of Default and the trustee has the right to foreclose on the leasehold interest and operate the project under the ground lease. The trustee may accelerate with at least 25% investor approval.

Fitch views current coverage as adequate, but relatively stable. Project net revenues available for debt service reached $7.94 million in fiscal 2015 (estimated) and covers all project outstanding debt by 1.31x, similar to fiscal 2014 levels. Debt service is level through the life of the bonds.

OCCUPANCY REMAINS STRONG
Pledged revenue is almost entirely reliant on rental income. This reliance on a single revenue stream highlights the importance of maintaining strong project occupancy.

On a stand-alone basis, project occupancy is strong at about 95.4% in fall 2015. Fitch notes, however, that occupancy is down from nearly 100% in the prior year and is modestly below the project's budgeted 96% occupancy level. By comparison, the system's overall occupancy was about 95% for fall 2015 and also lower than historical levels. Fitch notes that there has generally been a waiting list for the fall semester, whereby overflow students were housed in a local hotel. However, there was no overflow housing in fall 2015 as seen historically.

Fitch will continue to monitor the project's ability to maintain strong occupancy. A continuous lack of system-wide overflow housing reflects weakening in demand and provides less assurance that vacancies can readily be filled. The economic feasibility of the project facility depends on the ability of UTC to attract sufficient residents and to maintain adequate occupancy at projected rent levels. According to management, at least 79% occupancy would be required to achieve breakeven performance (at least 1.00x coverage) at current rent levels.

LIMITED PRICING FLEXIBILITY
Limited revenue diversity for a project of this nature is not viewed as unusual by Fitch, and this element is partially mitigated by the project's high demand despite higher rent levels than alternative campus housing.

Given the project's strategic location, modern facilities and amenity package, UTC has historically priced project beds at a premium relative to other options within the system. While rental rates for the project are higher than other campus housing options, they are on par or lower than market rates according to staff reports.

Project rental rates increases, while lower in recent years, remain adequate to manage the legally required coverage levels set forth in the bond documents at current occupancy levels. However, a reduction in occupancy without a corresponding increase in project rates could negatively impact future coverage.

The University of Tennessee System implemented an average rent increase of 3% in fall 2015 similar to fall 2014. This is lower than the 3.5% increase in fall 2013 and the 5% increases seen historically, which management deems necessary in order to maintain the system's competitive standing. Rental rate increases are expected to remain at the current level in fall 2016 which is expected to be necessary to maintain the forecasted coverage levels provided to Fitch.

Management's inability to increase the rate of rental increases, if necessary, and grow rental income due to increased competition from other on-campus housing could prevent gradual improvement in debt service coverage for the forecasted period through 2020. Fitch is concerned that the projects already high rent, relative to other on-campus housing, could limit the project's pricing flexibility in the future.

Management reports that recent growth in rental income, improved collections, lower management fees and better cost controls should allow for improved project debt service coverage levels overtime.

UTC ENROLLMENT
UTC is a metropolitan university, located near downtown Chattanooga. UTC's enrollment is a key driver of housing occupancy. Though freshmen enrollment fell slightly in fall 2015 and is somewhat vulnerable under the state-wide Promise scholarship program, which provides free community college for two years, total enrollment is still largely stable and expected to grow over time due to an increase in transfer students due to mutual admissions with the state's community colleges.

Fitch will continue to monitor UTC's enrollment and its overall impact on project occupancy and project revenues which ultimately drive debt service coverage levels.

NEW UTC HOUSING
UTC's campus master plan includes construction of additional auxiliary housing slated to open in fall 2018. Currently there are approximately 30% of full time equivalent students that reside on campus. According to management, the university's residency requirement for freshmen, expected growth in enrollment and overcrowding in existing on-campus housing facilities drives demand for additional housing.

Overflow housing historically has provided sufficient backfill to keep occupancy levels high. According to management, upperclassmen that need beds are regularly turned away because of limited beds on-campus. Upperclassmen prefer the amenities of the project housing on UTC's south campus which helps fuel strong occupancy of project beds.

Fitch expects UTC to maintain the project's solid occupancy levels and generate net revenues necessary to support associated debt service, if and when UTC's additional beds are added. According to management, any additional auxiliary housing debt is not expected to be debt of the foundation or be on parity with the bonds which is viewed favorably by Fitch.