OREANDA-NEWS. February 29, 2016. Fitch Ratings assigns an 'AA' rating to the expected issuance of approximately \\$90.76 million California Educational Facilities Authority (CEFA) revenue bonds, series 2016, issued on behalf of Pepperdine University (Pepperdine or the university).

The fixed-rate series 2016 bonds are expected to sell by negotiated sale the week of Feb. 29, 2016. Bond proceeds will be used to advance refund approximately \\$14.16 million of the university's currently outstanding series 2010 bonds, with approximately \\$76.60 million funding various capital improvements on the Malibu campus, and pay costs of issuance.

At the same time, Fitch affirms the 'AA' long-term rating on the university's outstanding series 2015 bonds.

The Rating Outlook is Stable.

SECURITY
The bonds are an unsecured absolute and unconditional general obligation of the university.

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE: The 'AA' rating reflects Pepperdine's solid financial profile, which is highlighted by a strong balance sheet, consistently positive operations, and a moderate debt burden which is supported by sound maximum annual debt service (MADS) coverage. Additional credit strengths include steady undergraduate enrollment, favorable management practices, and an attractive campus located in Malibu, CA.

STABLE ENROLLMENT TRENDS: Fitch views Pepperdine's overall enrollment trends as stable, which is supported by modest growth in undergraduate admissions and matriculations in fall 2015, though some graduate programs remain challenged. Pepperdine's freshmen yield rate is lower than peer institutions at 19.7% due a very competitive operating environment.

EFFECTIVE MANAGEMENT PRACTICES: Pepperdine has a history of solid financial performance, which Fitch believes is a reflection of the organization's effective management practices which includes conservative budgeting and prudent long-range financial planning. Additionally, management has a conservative debt structure composed of 100% fixed-rate debt with no swaps or bullet maturities.

COMPETITIVE OPERATING ENVIRONMENT: The university operates in a competitive environment located in southern California. However, Fitch believes Pepperdine has a strong reputation and brand in addition to its location in Malibu, all of which help serve as market differentiators.

RATING SENSITIVITIES
CONSISTENT PERFORMANCE EXPECTED: Fitch expects Pepperdine University to continue to generate consistent positive margins, which supports solid MADS coverage and balance sheet resources. Although unexpected, any significant deterioration to Pepperdine's strong balance sheet would be viewed negatively.

ADDITIONAL DEBT: Pepperdine University has limited additional capital needs over the medium term. The incurrence of additional debt, without commensurate growth in resources, could exert rating pressure.

CREDIT PROFILE
Pepperdine University, founded in 1937, is a Christian University in the Church of Christ tradition. The university is made up of five schools - Seaver College of Letters, Arts and Sciences; Graduate School of Education and Psychology; Graziadio School of Business and Management; School of Law; and School of Public Policy.

In addition to the university's 830-acre main campus located on the coast overlooking the Pacific Ocean in Malibu, California, there are six international sites, along with a site in Washington, DC, that support the university's study-abroad program. The university offers associate, bachelors, masters, and doctoral degrees to about 7,600 students.

SOLID FINANCIAL PROFILE
Pepperdine's financial profile is highlighted by a strong balance sheet, consistently positive operations, and a moderate debt burden of about 6% that is supported by sound MADS coverage.

As of July 31, 2015, available funds, defined by Fitch as cash and investments not permanently restricted, totaled \\$679 million, which improved from fiscal 2014's \\$645 million. This covered fiscal 2015 operating expenses and pro forma long-term debt by 225% and 217%, respectively, both considered comparable for the 'AA' rating category and viewed as a primary credit strength.

In fiscal 2015, Pepperdine had adjusted total unrestricted operating revenue (including portion of endowment payout) of \\$335 million and generated a solid 9.9% operating margin, up from fiscal 2014's 7%. Management attributes consistently positive margins to good undergraduate enrollment growth and demand stability along with prudent expense management practices.

Pepperdine's solid operations supported healthy coverage of MADS of 3.2x in fiscal 2015. Post the 2016 financing, the university's pro forma debt service is expected to be relatively flat. The university's debt portfolio is entirely fixed-rate with no swaps or large bullet maturities. Fitch included payments for a new \\$15 million 10-year and five-month non-cancellable operating lease for instructional and administrative space in Calabasas, CA. The university's taxable series of bonds, which had a \\$50 million bullet payment in fiscal 2020, was recently repaid.

STABLE ENROLLMENT TRENDS
Total headcount enrollment remained steady over the last year. For fall 2015, total headcount grew about 3% to about 7,600 students. Approximately 46% and 54% of the headcount enrollment in fall 2015 were classified as undergraduate and graduate students, respectively.

The number of incoming freshmen and transfer students has seen some fluctuations in past years; however, the fall 2015 incoming freshmen class grew by 13.6% or 89 students to 745 students, compared to an average class size during the period fall 2010 through 2015 of 713 students. Further, incoming transfers grew by 30% or 36 students to 156 students in fall 2015. Undergraduate enrollment stability is a credit positive as the university operates in a competitive environment located in southern California.

Despite the competitive concerns, Fitch believes Pepperdine has a strong reputation and brand in addition to an attractive location in Malibu, which help serve as market differentiators. Approximately 48% of enrolled students are California residents, with the next largest cohorts being Texas and International, at 7.8% and 9.8%, respectively.

Overall, Pepperdine serves a diverse student body. Graduate admissions are mixed by several programs. Overall, fall 2015 graduate applications were down slightly by 1.4% in fall 2015 to 5,346. The overall fall 2015 graduate acceptance rate was 56% compared to 62% in the prior year as a result of improved selectivity. However, overall yield of 36% was generally flat over the prior year reflecting that challenges remain in some of Pepperdine's graduate programs.

Fitch views Pepperdine's conservative budgeting favorably. The university is consistent in beating undergraduate enrollment budgets and, as some graduate program enrollments have been challenged, budget expectations have been revised with commensurate expense adjustments.

ADDITIONAL LEVERAGE
The current plan of finance provides for a maximum par not to exceed \\$100 million. The 2016 bonds will fund the completion of various components of Pepperdine's campus life project, which the university is pursuing a year earlier than anticipated in order to take advantage of favorable market rates. Pepperdine intends to expand student housing capacity for approximately 358 students on its Malibu campus in fiscal 2018.

Fitch would expect any incurrence of additional debt to be accompanied by a growth in resources commensurate with the additional leverage. Fitch will evaluate any financing plans at the appropriate time.

For additional information, see 'Fitch Rates Pepperdine University's (CA) Series 2016 Revs 'AA'; Outlook Stable' (July 14, 2015), available at www. fitchratings.com.