OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to approximately $191 million of Clemson University higher education revenue bonds series 2015B.

The fixed-rate bonds are expected to sell via competitive sale on or about the week of Dec. 7. Bond proceeds will be used to defray costs of the Douthit Hills residential complex and related projects, fund capitalized interest through the construction period, and pay costs of issuance. The bonds are on parity with approximately $110.9 million of Clemson's outstanding higher education revenue bonds.

In addition, Fitch affirms the following ratings:

--$90.3 million of Clemson University higher education revenue bonds series 2015 at 'AA';

The Rating Outlook is Stable.

SECURITY

The bonds are payable solely from and secured by a pledge of the net revenues of the facilities and additional funds. The facilities include student housing, bookstores, dining halls and other food service and parking facilities, but exclude athletic facilities. Additional funds reflect the gross receipts from a university fee which includes the total academic fee that is charged to all students; however, they specifically exclude special student fees and tuition and matriculation fees. The bonds include a sum sufficient rate covenant based on the net facilities revenues.

KEY RATING DRIVERS

STRONG OPERATING PROFILE: Clemson maintains healthy student demand trends that are evidenced by steady enrollment growth, fairly selective admissions, increasing application volume, good student quality, and significant out-of-state student representation.

POSITIVE FINANCIAL PERFORMANCE: The university's financial profile is sound, with consistently positive operating margins, adequate balance sheet liquidity, strong fundraising ability, and a growing but still manageable debt burden.

ROBUST REVENUE PLEDGE: Pledged net facilities revenues have grown over the past several years and provide solid coverage of related debt service; pledged revenues are expected to grow further as Clemson's ongoing strategic plans include various revenue-generating projects that are expected to come online over the next few years. The pledge of additional funds broadens the pledge and lends further credit strength.

SUBSTANTIAL CAPITAL PLANS: Clemson's financial leverage will increase significantly post-issuance as the university proceeds with its capital plan. Clemson's capital program is generally funded with university reserves, fundraising, and debt, including higher education revenue bonds, athletic facility revenue bonds (not rated by Fitch), and state supported GO bonds (South Carolina GOs rated 'AAA'/Outlook Stable).

RATING SENSITIVITIES

ENROLLMENT STABILITY: The rating is sensitive to Clemson University's ability to maintain stable to growing enrollment levels, thereby generating sufficient net facilities revenues and student-derived additional funds to adequately cover auxiliary-related revenue bond debt service.

CAPITAL PLAN EXECUTION: The successful execution of Clemson's significant capital plans and achievement of fundraising goals are crucial to maintain rating stability and help offset the university's substantial debt issuance plans.

CREDIT PROFILE

Founded in 1889, Clemson is a state-supported land grant institution located in Clemson, SC that is dedicated to teaching, research, and public service. It is classified as a Doctoral/Research University-Extensive by the Carnegie Foundation and serves over 22,000 students.

STRONG DEMAND DRIVES OPERATIONS

Clemson has benefited from healthy enrollment trends in recent years. Fall 2015 headcount enrollment totaled 22,623, up 3.5% from fall 2014, with average annual growth of about 3% since fall 2010. Continued growth reflects healthy demand from full-time undergraduates (about 80% of total enrollment) and graduate students. A significant portion of Clemson's students (38%) are from out of state, indicative of the university's strengthened brand recognition and expanding draw.

The university maintains fairly strong selectivity for a public institution. Its fall 2015 acceptance rate was 51.3%, with strong application growth from in- and out-of-state students. While demand remains strong, Clemson's matriculation rate was more modest at 30%, although the number of matriculating students was stable. Solid student quality and high retention and graduation rates further demonstrate Clemson's healthy operating profile.

SOLID FINANCIAL PERFORMANCE

Clemson benefits from a moderately diverse revenue base, although student-generated tuition, fees and auxiliary receipts make up half of total operating revenues (52.1% in fiscal 2015). Other major sources include grants and contracts (16.9%; including state and federal student aid), and state appropriations (12.4%).

Clemson's operating margin (as calculated by Fitch) has been consistently positive over the past several years, averaging a solid 4.8% from fiscal years 2011 - 2015, although the margin narrowed to 2.8% in fiscal 2014 and 1.4% in fiscal 2015. Fitch anticipates the university will maintain balanced operations due to continued enrollment and associated revenue growth, modestly improving appropriations, and management's prudent expense management. Fitch's financial metrics for Clemson include an athletic support organization (IPTAY), which remains a component unit but became an independently operating entity in fiscal 2015.

ADEQUATE BUT LIMITED BALANCE SHEET CUSHION

Clemson's balance sheet resources are somewhat limited and provide a modest financial cushion. Available funds (defined as cash and investment less nonexpendable and certain expendable restricted net assets) totaled $397.4 million as June 30, 2015, which covered fiscal 2015 operating expenses ($844.4 million) by an adequate 47% and pro forma debt ($589 million) by 67.5%.

However, available funds include substantial unspent bond proceeds and are not directly comparable to the prior year. Fitch expects that available funds coverage of operating expenses and debt will trend toward roughly 30% and 45%, respectively, as the capital plan is executed. These levels are somewhat lower than peers but are adequate for the rating given the bonds' broad pledge and Clemson's healthy demand profile.

Fitch's available funds calculation also excludes the assets of Clemson's various related, but separate supporting foundations. The largest is the Clemson University Foundation, which had total cash and investments of $661 million as of June 30, 2015, inclusive of $180 million of direct Clemson funds. Clemson's net position was restated to comply with GASB 68, causing a reduction of approximately $450 million in fiscal 2015 to reflect its share of state retirement plans' liabilities. This reporting change does not affect Fitch's calculation of available funds or debt.

LARGE CAPITAL PLAN PARTLY OFFSET BY MANAGEABLE DEBT BURDEN

Clemson's overall debt structure is conservative, made up entirely of amortizing, fixed-rate debt and a gradually declining debt service schedule. Despite sizeable debt issuance in recent years, Clemson's overall debt burden is still manageable, with pro forma MADS ($38.5 million; occurring in 2020) consuming 4.5% of fiscal 2015 operating revenues. Institutional MADS coverage from operations is also acceptable at 1.8x.

Net facilities revenues pledged to the higher education revenue bonds totaled $20 million in fiscal 2015, providing healthy 2.9x coverage of the current year's $6.9 million debt service. Post-issuance, auxiliary debt service is expected to be around $17 million annually, which should be offset by revenues generated from the Douthit Hills project. Additional funds, which include the mandatory university fee charged to students, are also pledged to the bonds. Totaling $310.3 million in fiscal 2015, available funds constitute a broad pledge of student fees and strengthen the bonds' security.

Clemson maintains additional capital plans to accommodate recent and expected growth. Concurrent with this issuance, Clemson plans to issue approximately $20 million of athletic facility revenue bonds. In addition, certain academic projects have either been state-approved or just conceptually approved by the university's board. Some of these projects may be partially funded from additional GO state institution bonds. Rating stability will depend on the university's successful execution of capital projects and fundraising goals, while maintaining its strong demand profile necessary to support generation of pledged revenues.