OREANDA-NEWS. January 20, 2016. Fitch Ratings has assigned an 'AA' rating to the following bonds issued by the S.M. Educational Building Corporation, MS (EBC) on behalf of the University of Southern Mississippi:

--\\$59.015 million revenue refunding bonds series 2016 (University of Southern Mississippi [USM]) revenue facilities refinancing project).

The bonds are expected to price via negotiation the week of January 18. Series 2016 bond proceeds will advance refund the S.M. Building Authority's series 2009 campus facilities bonds, and defease and refund the outstanding 2009 certificates of participation related to USM's parking facilities project.

In addition, Fitch affirms the ratings on parity Mississippi Institutions of Higher Learning debt listed at the end of this commentary.

The Rating Outlook is Stable

SECURITY

EBC bonds are payable from designated revenues of the eight academic institutions overseen by the Mississippi State Institutions of Higher Learning (IHL), pursuant to a lease agreement. Designated revenues include net tuition, fees, and auxiliary revenues; sales and services; other operating revenues; state operating appropriations; and unrestricted net assets. IHL's obligation under the lease is absolute and unconditional. There is no debt service reserve fund for the series 2016 bonds.

KEY RATING DRIVERS

SOUND SYSTEM FINANCIAL OPERATIONS: The 'AA' rating reflects IHL's sound and stable financial profile, as evidenced by consistently breakeven-to-positive GAAP-based operating performance, a satisfactory level of available funds relative to operating expenses and debt, a diverse revenue base, and state operating and capital support (state of Mississippi rated 'AA+'/ Stable Outlook).

INTEGRAL STATE EDUCATION ROLE: The eight IHL member institutions benefit from their role of providing all four-year public higher education and research services in the state. Additionally, the University of Mississippi Medical Center (UMMC) is a major healthcare provider.

MANAGEABLE DEBT BURDEN: The system's manageable pro forma maximum annual debt service (MADS) burden is a moderate 3.8% of fiscal 2015 unrestricted operating revenues. Net operating income regularly provides solid pro forma MADS coverage averaging more than 2.0x since fiscal 2010, including 2.4x based on fiscal 2015 operations. Ongoing capital plans for member institutions appear manageable.

RATING SENSITIVITIES

WEAKENED FINANCIAL PROFILE: Material erosion in Mississippi State Institutions of Higher Learning (IHL) system-wide operating performance or balance sheet ratios, which is not anticipated at this time, could pressure the rating. IHL benefits from relatively system-wide stable enrollment and a prominent state-wide education role.

CREDIT PROFILE

Founded in 1944, IHL governs the state's eight four-year higher education institutions: Alcorn State University, Delta State University, Jackson State University, Mississippi State University (MSU), Mississippi University for Women, Mississippi Valley State University (MVSU), University of Mississippi (UM), and University of Southern Mississippi (USM). It also includes UMMC, which is part of UM.

Fitch views the system's historical stability as providing some flexibility to manage enrollment and demographic cycles. Rapid system enrollment growth since 2008 has leveled off in recent years due to lower community college enrollment and fewer transfer students, as well as flat to declining numbers of high school graduates in Mississippi. Fitch expects IHL to manage effectively through the system's periodic enrollment cycles.

Preliminary headcount for fall 2015 for all IHL member institutions was 81,024, up 1.7% from 79,704 in fall 2014. IHL projects generally stable enrollment in the next several years, supported by continued out-of-state recruitment (about 27% of system headcount is from out of state, principally at UM and MSU), and growth in online learning.

UM is IHL's largest member institution (about 23,838 headcount in fall 2015, about 29% of the IHL system), followed by MSU (about 20,873 or 26%) and USM (about 14,551 or 18%). Preliminary enrollment for the other five members ranged from 2,309 to 9,802. The UM Medical Center receives state funding independently, but is part of UM. Of the eight system institutions, UM has realized the most enrollment growth in recent years, up nearly 22% between fall 2010 and 2015.

USM was founded in 1910 and accepted its first students in 1912; it is one of eight institutions of higher learning in Mississippi. USM has campuses in Hattiesburg and Long Beach, as well as five teaching and research sites in Mississippi. Enrollment for fall 2015 was 14,551, down from 16,604 in fall 2011. USM offers more than 140 undergraduate degree programs, as well as graduate and doctoral degrees.

SOUND SYSTEM OPERATIONS

IHL's balanced operating performance supports the 'AA' rating. IHL consistently generates breakeven-to-positive GAAP-based operating results, including 3.6% in fiscal 2015. The system has managed effectively through several years (fiscals 2010-2013) during declines in state operating appropriations and federal grants and contracts.

Positively, state appropriations for the entire system increased by 3.4% in fiscal 2016, 3.35% in fiscal 2015, and 5.74% in fiscal 2014. Fitch views IHL as having good revenue diversity. In fiscal 2015, operating revenues included operating appropriations (22%), healthcare operations (31%), grants and contracts (11.8%, including federal scholarship programs); and student/auxiliary fees (24%). This revenue mix is not expected to change materially.

ADEQUATE SYSTEM BALANCE SHEET

The system's balance sheet ratios remain consistent with the 'AA' rating category. Available funds (AF), defined by Fitch as cash and investments less certain restricted net assets, totaled \\$1.37 billion at June 30, 2015. AF represented an adequate 43% of operating expenses and a stronger 91% of pro forma debt (about \\$1.5 billion).

Fitch's AF calculation excludes endowment held in separate foundations. At the end of fiscal 2015, foundation net assets benefiting UM, MSU and USM totaled \\$1 billion, of which the majority was restricted.

MANAGEABLE SYSTEM DEBT BURDEN

Pro forma system debt is about \\$1.5 billion, including bonds, notes, non-cancellable operating leases, and capital leases. Pro forma MADS of approximately \\$125 million represented a moderate 3.8% of fiscal 2015 operating revenues.

The system's debt portfolio is conservatively structured, with front-loaded amortization and mostly fixed-rate debt. Institutional MADS coverage is regularly around 2x, a solid level. Pro forma MADS is 2.4x based on fiscal 2015 operations. Future debt plans appear manageable.

For more information about IHL, please see Fitch's report on the University of Mississippi Educational Building Corp (MS) 2015C & D Revs, dated Oct. 9, 2015.

Fitch has also affirmed the following parity IHL bonds:

--\\$105.25 million USM EBC revenue bonds series 2013, 2015A and 2015B at 'AA'; Outlook Stable

--\\$70.7 million Jackson State University EBC revenue bonds series 2015A, 2015B at 'AA'; Outlook Stable;

--\\$314.4 million Mississippi State University EBC revenue bonds (various series 1998, 2007A, 2009A-1, 2009A-2, 2011, 2013, 2014A, 2014B, 2015) at 'AA'; Outlook Stable;

--\\$50 million authorized Mississippi State University EBC CP program at 'F1+';

--\\$17.27 million Mississippi Valley University EBC revenue bonds series 2015 at 'AA'; Outlook Stable;

--\\$188.5 million University of Mississippi EBC revenue bonds (various series 2005, 2006A, 2006B1, 2008A, 2009A, 2009B, 2009C, 2011, 2015A, 2015B, 2015C, 2015D) at 'AA'; Outlook Stable.