OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to approximately $50.505 million series 2016B and 2016C taxable certificates of participation (COPs) issued by the Nevada System of Higher Education (NSHE or the system).

COP proceeds will refund $50 million series 2015B notes and pay issuance expenses.

The series 2016BC COPs are expected to price via negotiated sale the week of March 7, 2016.

Fitch also affirms the rating on the following outstanding obligations:

--Approximately $690,000 series 2006A COPs at 'AA';
--Approximately $33.4 million series 2014A COPs at 'AA'; and
--$63.10 million series 2016A COPs at 'AA'.

The Rating Outlook is Stable.

SECURITY

The COPs are payable from all legally available NSHE funds after payment of debt service on the system's outstanding senior lien university revenue bonds URBs. The COPs are an absolute and unconditional pledge of the system and are not subject to annual appropriation or abatement risk. State operating appropriations are specifically not pledged.

Pledged revenues for the URBs are derived primarily from specific student fees/charges and net auxiliary revenues of the system's two universities. There are substantial revenues not pledged to the URBs that are available to pay the subordinate COPs and related parity obligations.

KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'AA' rating reflects the system's strong state-wide market position, gradually improving student demographics, current increases in state support, moderate debt burden and adequate balance sheet ratios. Negative GAAP operating margins and narrowing institutional coverage are offsetting factors.

COPs PAYMENTS OBLIGATORY: The system's obligation to pay debt service on the subordinate lien COPs and parity obligations is absolute and unconditional. In addition, significant revenue is available for this debt that is not pledged to the senior lien URBs. The potential for credit dilution from URB issuance, though not expected, continues to exist.

SOLID MARKET POSITION: The system provides the only public higher education in Nevada (State GOs rated 'AA+'/Stable Outlook). FTE enrollment at the two universities is increasing, while enrollment at the primarily two-year institutions fluctuates with economic cycles.

GROWTH IN STATE APPROPRIATIONS: State support is a substantial portion of overall funding at 32% of fiscal 2015 revenues. However, it is still much reduced from pre-recession levels (44% of revenues in fiscal 2009). NSHE's state appropriations stabilized in fiscals 2013 and 2014, increased modestly in fiscal 2015, and are up 8.9% in fiscal 2016.

NEGATIVE GAAP MARGINS: System operations are consistently negative on a GAAP basis but positive on a cash basis before depreciation expense. Institutional maximum annual debt service (MADS) coverage (including all debt security types), however, is slim at about 1.2x in fiscal 2015.

MANAGEABLE DEBT BURDEN: The system's moderate 3.7% pro forma MADS debt burden and conservative fixed-rate debt portfolio are credit strengths. Fitch does not expect near-term debt plans to pressure the rating.

RATING SENSITIVITIES
FINANCIAL PROFILE DETERIORATION: Failure of the Nevada System for Higher Education to generate positive system-wide debt service coverage of combined senior and subordinate debt would cause a rating downgrade.

NEGATIVE GAAP MARGINS: Worsening GAAP operating deficits could pressure the rating.

CREDIT PROFILE
Established in 1864, the system consists of two principal university campuses: University of Nevada, Reno (UNR) and the University of Nevada, Las Vegas (UNLV), four community colleges, the Nevada State College at Henderson (NSC, a four-year institution founded in 2002), and the Desert Research Institute (the system's basic and applied environmental research division). Fall 2015 FTE enrollment was 70,714, with the two universities at 39,499 and NSC and the two-year institutions at 31,215.

SOLID MARKET POSITION FOR ENROLLMENT
NSHE is the only provider of public higher education in the state. System enrollment fell after the 2008 recession, following a 17-year growth period. Since fall 2011, FTE enrollment at the two universities has rebounded about 9%, although the community colleges and NSC are down 13%. Enrollment at the community colleges tends to run counter-cyclical to economic conditions, which is a national trend.

Projections from the Western Interstate Commission for Higher Education indicate that the number of Nevada high school graduates is beginning to increase after a period of decline, and management has long-term expectations for continued enrollment growth. In addition, the two universities have seen increased out-of-state enrollment, particularly from California.

IMPROVING STATE FUNDING SUPPORT
Following several years of significant cuts in operating support, state operating appropriations were relatively flat in fiscal 2013 and 2014, then grew 2.5% in fiscal 2015 and 8.9% in the current fiscal 2016 (to $544 million). Another 5% increase is expected in fiscal 2017, the second half of the current biennium. Historically, state support fluctuates with economic cycles, and current funding remains below pre-recession levels of about $620 million. Appropriations comprised a significant 32% of operating revenue in fiscal 2015.

Tuition and fees comprised another 31% of fiscal 2015 revenue. The system increased in-state student fees by about 4% in fiscal 2016, and similar annual increases are scheduled through fiscal 2019.

TIGHTER FINANCIAL OPERATIONS
The system has generated negative GAAP-based operating margins in recent years. As calculated by Fitch, fiscal 2015 results were negative $52.9 million (-3.5% margin), compared to negative $28.4 million in fiscal 2014 and negative $13.3 million in fiscal 2013. On a cash basis before depreciation expense, operations remained positive. At this time, system management expects fiscal 2016 GAAP results to be similar to fiscal 2015 following increases in both student fee rates and operating appropriations.

Fitch's expectation for public colleges and universities is at least break-even performance on a full accrual basis. For NSHE, GAAP operating deficits are partially mitigated by positive debt services coverage on a cash basis, and the system's important role in providing education in the state.

Institutional MADS coverage has narrowed in recent years. When adjusted for a small bullet maturity that the system plans to refinance, fiscal 2015 MADS coverage was 1.2x, compared to 1.5x in fiscal 2014 and 1.98x in fiscal 2013. Fitch calculates institutional coverage from consolidated audit results and includes debt service for all debt types. Fiscal 2015 coverage is slim compared to peer Fitch-rated public universities.

SOUND FINANCIAL CUSHION
Available funds (AF), defined by Fitch as all cash and investment less certain net assets, was approximately $935 million at June 30, 2015, similar to fiscal 2014 levels. AF equaled 60% of fiscal 2015 operating expenses, and a stronger 135% of pro forma debt (about $692 million). The latter ratio is slightly understated as Fitch included $43.4 million of state COPs in pro forma debt - starting in fiscal 2015, related debt was included in NSHE's audited capital lease amount.

MANAGEABLE DEBT BURDEN
Fitch's analysis includes all debt service paid by the system, including senior URBs and subordinate COPs, notes, and leases. Pro forma MADS of about $56.5 million occurs in 2017; this amount excludes about $7 million of notes that the system expects to refinance. Pro forma MADS is a modest 3.7% of fiscal 2015 operating revenues. The system's overall debt structure is conservative, with fixed-rate debt and rapid principal repayment.

The state legislature has authorized approximately $244 million of URBs, community college revenue bonds, and NSC bonds. Management reports no near-term plans to issue additional obligations at this time.

COPs PAYMENTS AN UNCONDITIONAL OBLIGATION
Post issuance, the COPs and other note and lease parity debt total about $270 million. This includes the series 2016BC COPs and various notes that are outstanding or are expected to be issued to bridge donor gifts. Pro forma URB debt is about $417 million.

The 'AA' COPs rating is supported by NSHE's unconditional obligation to make the principal and interest payments on the system's COPs and parity notes and leases. The COPs are not subject to appropriation or abatement risk.

Importantly, the COPs and parity subordinate obligations benefit from both a subordinate pledge of URB net revenue (about $221 million in fiscal 2015), and from additional legally available funds (about $373 million) not pledged to the URBs. Such additional funds include unrestricted revenues and student fees (tuition and registration), non-resident student fees, and other income.