OREANDA-NEWS. November 24, 2015. Fitch Ratings has affirmed the 'BBB' rating on \\$31.5 million of California Educational Facilities Authority revenue bonds issued on behalf of the University of Redlands (UR).

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are an unsecured general obligation of UR.

KEY RATING DRIVERS

IMPROVED FINANCIAL PERFORMANCE: The Positive Outlook reflects UR's improved financial performance. UR posted GAAP-basis operating surpluses in fiscal years 2014 and 2015, after several years of operating deficits. UR expects operations to remain breakeven-to-positive after structural budget improvements in recent years.

ADEQUATE FINANCIAL CUSHION: UR's balance sheet has improved due largely to consistent cash surpluses. Available funds at June 30, 2015 covered 57.6% of operating expenses and 87.2% of debt. These figures compare favorably to 'BBB' category peers, and UR has recovered significantly from major recession-era investment losses that contributed to Fitch's 2011 rating downgrade.

GENERALLY STABLE ENROLLMENT TRENDS: UR maintains generally stable enrollment driven by sound demand. Moderate volatility reflects a competitive environment, but Redlands has a track record of good enrollment management. Effective management of enrollment is crucial to the budget and helps mitigate UR's very high (91%) reliance on revenue from student charges.

MODERATE DEBT BURDEN: UR's debt burden compares favorably to 'BBB' category peers. Maximum annual debt service (MADS; adjusted to exclude note maturities in 2017) equaled a moderate 4.2% of fiscal 2015 operating revenues. MADS coverage has averaged 2.3x over the past five years, reflecting solid cash flow even in years with full-accrual deficits.

RATING SENSITIVITIES

BALANCED OPERATIONS: The University of Redlands' continued balanced operations and sound debt service coverage would demonstrate structural budgetary balance and would likely lead to an upgrade over the next two years.

BALANCE SHEET RESOURCES: Material additional debt or capital spending without a commensurate increase in financial resources could negatively pressure the rating.

CREDIT PROFILE

Originally founded in 1907 by members of the American Baptist Church, UR is a non-sectarian private university. In addition to its main campus in Redlands, CA, the university also maintains seven satellite locations in southern California.

IMPROVED FINANCIAL PERFORMANCE
UR's operating margin improved to 1.1% in fiscal 2014 and 6.6% in fiscal 2015, reversing a long trend of negative GAAP-basis results since 2006. Fiscal 2015 results partially reflect an unusually strong fall 2014 admissions cycle. Still, Fitch believes UR's budget is now structurally balanced and adequately conservative. UR expects to continue to generate at least breakeven-to-positive margins due to moderately conservative budget assumptions, increased budgeted capital spending, formal contingencies, and a multi-year effort to right-size recurring expenses.

ADEQUATE FINANCIAL CUSHION
UR has substantially repaired its balance sheet since suffering significant investment losses in fiscal 2009. Available funds (AF; defined as cash and investments less permanently restricted net assets) improved 11.1% year-over-year to \\$70.8 million as of June 30, 2015 and have more than doubled from their lowest point in 2009. AF now equal an adequate 57.6% of operating expenses and 87.2% of debt, figures which compare favorably to 'BBB' category peers. UR management has prudently set aside portions of annual cash surpluses into various reserve funds to build its balance sheet cushion.

Approximately \\$99.6 million of UR's \\$133.3 million endowment is permanently restricted and therefore excluded from Fitch's AF calculation. While not expendable, these resources provide some additional financial flexibility through a 4%-5% annual draw, which Fitch considers sustainable. UR's investment allocation to alternatives remains moderately high for the rating category at 33%, but is dramatically improved from the 76% allocation in 2010.

Redlands' fundraising profile is sound for the rating category. A comprehensive campaign, begun in 2013, has raised \\$92 million to date of its \\$200 million goal. The campaign is heavily focused on endowment funds but should still provide some additional balance sheet resources over time.

GENERALLY STABLE ENROLLMENT TRENDS

UR maintains generally stable enrollment despite a very competitive operating environment. Enrollment reached its historic peak in fall 2014 (FTE of 4,556), reflecting a strong admissions cycle and good retention. FTE enrollment dipped 1.4% in fall 2015 but remains above historical levels. Management attributes the drop largely to weaker yield for traditional undergraduates (58% of total FTE) after discounting was reduced by about four percentage points for incoming students.

Moderate volatility, as well as UR's high overall discounting rate of 38.5%, demonstrates the competitiveness and price sensitivity of UR's market. However, fall 2015 results were manageable from a budgetary perspective, and management expects fall 2016 to normalize due to restoration of some cut discounting as well as process improvements. Given UR's very high (91%) reliance on student charges for operating revenues, effective enrollment management is critical. Development of a sustained negative enrollment trend would pressure the rating.

MODERATE DEBT BURDEN

UR has a moderate debt burden and sound debt service coverage, which compare favorably to 'BBB' category peers. MADS of \\$5.5 million (occurring in fiscal 2017) equaled a very manageable 4.2% of fiscal 2015 operating revenues. MADS coverage from operations has averaged a sound 2.3x over the past five years and should remain over 2x so long as UR maintains breakeven GAAP-basis operations.

Fitch's calculation of MADS excludes \\$5.3 million of bank note balloon maturities in fiscal 2017, as UR has sufficient liquidity to handle those payments if necessary. Conservatively including the balloon maturities, MADS of \\$10.8 million would equal a higher 8.2% of operating revenues, with adequate five-year average MADS coverage of 1.2x.

The university refunded approximately \\$35 million of outstanding bonds for savings in December 2014 but has no other specific debt plans at this time. Capital plans over the intermediate term could include a new dormitory project. While planning is in the early stages, the university would likely consider some additional debt funding or a developer-led financing if it proceeds. Material additional debt without a commensurate increase in financial resources could negatively pressure the rating.