UNIVERSITY WILL HAVE $112.4 MILLION OF RATED DEBT OUTSTANDING, INCLUDING THE CURRENT ISSUE
Indiana State University Board of Trustees
Student Fee Bonds, Series O
Expected Sale Date
Public University Revenue
NEW YORK, Mar 18, 2011 -- Substitute first paragraph, last sentence, with "The rating outlook is
revised to stable from positive reflecting the institutions lower gift revenue
and resource levels than peer institutions." Revised release follows.
Moody's Investors Service has assigned an A1 rating to Indiana State
University's $8.7 million of Student Fee Bonds, Series O. The bonds will be
issued in the fixed rate mode. At this time, Moody's has affirmed the ratings on
the university's outstanding debt, as outlined at the end of this report. The
rating outlook is revised to stable from positive reflecting the institution's
lower level of gift revenues and resource levels than peer institutions.
SUMMARY RATING RATIONALE
The A1 rating reflects the university's market position with healthy
demand, balanced operating performance, continued growth in net tuition revenue,
as well as weak fundraising and reliance on state appropriations for large
source of operating revenue.
*Consistently favorable operating performance with three-year average operating
margin of 5.1%, as calculated by Moody's, providing 1.3 times average debt
*Adequate coverage of pro-forma debt and operations with expendable financial
resources of $103 million providing a cushion of pro-forma debt by 0.9 times and
operations by 0.5 times.
*Healthy student demand and stable market position as a regional
public four-year institution, evidenced by fall 2010 enrollment of 9,685
full-time equivalent (FTE) students.
*Consistent operating appropriations and support from the State of Indiana
(rated Aaa) with the state contributing to approximately 42% of operating
revenues and providing fee replacement on nearly 77% of the university's
outstanding Student Fee bonds.
*Weak fundraising relative to comparably rated institutions although expected to
improve as the university nears completion of its first ever comprehensive
capital campaign with a goal of $85 million.
*High reliance on state appropriations at 42% of operating revenue reinforces
importance of recruiting success to diversify revenue streams and maintain
growth in net tuition revenue.
*Intensifying competition from surrounding regional publics and
private institutions and need to improve student retention, although fall 2011
demand is strong and first time freshman is expected to exceed budget.
DETAILED CREDIT DISCUSSION
USE OF PROCEEDS: Proceeds of the Series O bonds will be used to fund the
renovation of the School of Business' new building and to fund costs associated
LEGAL SECURITY: The bonds are payable from a pledge of and first lien on student
fees which includes nearly all academic fees, including tuition, and certain
other pledged funds. The bonds carry an additional bonds test that requires the
student fee revenue from the prior fiscal year to cover maximum annual debt
service a minimum of two times. In FY 2010, student fee revenues of $74
million covered maximum annual debt service 6.8 times. The Series O bonds are
issued on parity with Student Fee bonds, Series K, L, M and N. Although not
pledged, ISU receives an annual payment within its appropriation to cover full
debt service on the Student Fee bonds, subject to this appropriation.
Housing and Dining System bonds are payable from the net income of the Housing
and Dining System (the System) as well as from a broader pledge of Available
Funds, which include all residence halls, apartment and dining facilities, and
other available funds of the university, excluding mandatory student fees and
state appropriated funds. There is no debt service reserve fund. In FY 2010, the
System net income of $5.4 million provided 3.0 times annual debt service
coverage without inclusion of other available funds.
INTEREST RATE DERIVATIVES: None.
MARKET POSITION/COMPETITIVE STRATEGY: ESTABLISHED DEMAND WITH STABLE MARKET
The university serves as a regional public four-year institution serving the
west central area of the state in Terre Haute, Indiana. Originally founded as an
institution focused on teacher preparation, the university now serves 9,685
full-time equivalent students (FTE) in fall 2010, of which 88% are
undergraduates across various academic programs. From fall 2006 to fall 2009 the
university maintained relatively stable enrollment at approximately 8,800
FTEs. Prior to 2006 FTE was approximately 9,600 students. Management attributes
this interim decline to the university's decision to no longer offer remedial
level courses, expansion of the community college system and competition from
Purdue University (rated Aaa) and Ball State University (rated Aa3).
In fall 2010, the university experienced application growth due to the
university's marketing efforts and the "College Go"
initiative implemented by the Governor which called for all state public
institutions to wave application fees during a given week. In addition to
the increase in the number of applications, the university exceeded the budgeted
number of first time freshman (2,035), enrolling 2,707 freshman students. The
Board of Trustees approved a 3.9% tuition and mandatory student fee increase for
fall 2010. Price remains of high importance, as approximately 57% of first-time
freshman are first generation students. Growth of tuition revenue is a key
credit factor for this institution for providing good debt service coverage and
The university is implementing various initiatives regarding its
academic programs and student experience following the completion of a
strategic plan in 2008 led by the then newly-installed President. Part of the
plan looks to strengthen market demand by adding to its academic offerings,
including doctorates for nurse practitioners and physical therapists, and a
masters for physician assistants to enhance its health sciences program. Also,
the institution's primary market challenge continues to be in student retention
with approximately 64% of first time, full-time freshmen returning for their
sophomore year. Through initiatives outlined in the strategic plan, ISU has
implemented program to enhance retention. Success of these programs will be
critical for ISU to maintain enrollment levels and implement tuition increases
to grow tuition revenues.
OPERATING PERFORMANCE: OPERATING MARGINS PROVIDE SOLID DEBT SERVICE COVERAGE,
WITH MUCH OF DEBT SERVICE REIMBURSED BY THE STATE
Moody's believes the university's fiscal oversight will continue to
generate favorable operating margins and provide ample coverage of debt
service requirements. This operating strength is another factor that helps to
offset credit concerns surrounding possible enrollment fluctuations and
pressures. Over the past three years, the university has posted an average
operating margin of 5.1%, by Moody's calculation, representing good performance.
Operating cash flow has been sound, with an operating cash flow margin of 10%
generating average debt service coverage of 1.3 times.
The university relies upon state appropriations for 42% of its operating
revenues, while student fees (tuition and auxiliaries) represent 41%. Over the
2009-2011 biennium, state funding for the university was reduced by
approximately $10.5 million, of which the entire amount was applied ISU's share
of federal ARRA funding. The university reallocated internal funds and
implemented cost reduction initiatives in FY 2010 and FY 2011. For the
2012-2013 biennium, the university expects an additional appropriation
decline of $4 million, which it has budgeted to fully absorb in FY 2012.
Through its student fee replacement program, approximately 77% of the ISU's debt
service for the student fee bonds (Series K, L, M, N and O) is reimbursed by the
State of Indiana, although not pledged to bondholders. The reimbursement was
$8.2 million for FY 2010 and $8.9 million in FY 2011, equal to the debt service
eligible for fee replacement in both years. As a result, the university has a
relatively modest level of self-supported debt. The State has consistently
funded the full amount of fee replaced debt service even during difficult
economic times and Moody's expects this to continue for eligible bonds (Series
K, L, M, N and O). The Housing and Dining System Series 2009A, 2009B and 2010
bonds do not receive fee reimbursement from the State.
Moody's currently maintains an Aaa issuer rating on the State of Indiana, with a
stable outlook. The Aaa rating is based on governance structure that provides
for strong executive budgetary management, low debt levels, prudent use of
reserves which are offset by a persistent higher than average unemployment rate
and a low funded ratio of the Teacher's Retirement Fund. For more information,
see Moody's report published on March 15, 2011.
BALANCE SHEET POSITION: RESERVES PROVIDE ADEQUATE COVERAGE OF DEBT AND
Moody's believes that ISU's current financial resource base will continue to
provide adequate financial flexibility. At FY 2010, financial resources totaled
$148 million, of which $87 million was unrestricted. Between 2006 and 2010, the
university's total financial resources remained relatively flat, although
we note that unrestricted resources declined to $87 million in FY 2010 from $94
million in FY 2009 due to capital investment. Expendable resources of $103
million cover approximately $112 million of pro-forma debt 0.9 times, down from
1.0 times in 2009. Going forward we expect to see modest reserve growth from
retained operating surpluses and fundraising. The university is currently in a
capital campaign of $85 million. To date, approximately $75 million of the goal
has been pledged and $34 million received. While the campaign is currently
experiencing momentum, the university may be challenged in maintaining the
institutional culture of giving.
In FY 2010, the university carried a negative OPEB liability of $3.8 million due
to high contributions made during the year. Because the university carries a
negative liability, no adjustment has been made to the Moody's calculations to
the operating cash flow.
In FY 2010, the Foundation reported a positive 11% investment return and for
FY2009 the return was a negative 19%. Investments are allocated across global
equity (65%), global fixed income (17%), diversifying strategies (11%),
natural resources (3%), low volatility (3%) and real estate (1%). Management of
the endowment is overseen by a six member investment committee and the services
of an external consultant are utilized.
The university has plans to issue additional housing and dining revenue bonds
over the next decade, including approximately $70 million over the next five
years. At the time of each borrowing we will assess the relative impact, if any,
on the rating.
The stable outlook reflects Moody's expectation of continued support from the
state and well as fee replacement appropriations that represent a significant
portion of the university's debt. The outlook also reflects Moody's expectation
of favorable operating margins as well as a stable enrollment and student
WHAT COULD MAKE THE RATING GO UP
Growth in financial resource base; strengthening of fundraising; continued
stabilization of enrollment and improved retention rates
WHAT COULD MAKE THE RATING GO DOWN
Deterioration of market position; weakening of operating
performance; interruption and or reduction in State reimbursement of debt
service; downgrade of the State's general obligation rating
KEY INDICATORS (Fiscal year 2010 financial results and fall 2010
Total Enrollment: 9,685 full-time equivalent students
Total Pro-Forma Rated Debt: $112.4 million
Expendable Resources to Pro-Forma Debt: 0.9 times
Expendable Resources to Operations: 0.5 times
Average Operating Margin: 5.1%
Average Debt Service Coverage: 1.3 times
Monthly Liquidity: $114 million
Monthly Days Cash on Hand (unrestricted funds available within 1 month divided
by operating expenses excluding depreciation, divided by 365 days): 231 days
Percent of Revenues from State Appropriations: 42%
State Rating: Aaa with a Stable outlook
Student Fee Bonds, Series K and Series L: rated A1; insured by Ambac Assurance
Student Fee Bonds, Series M: rated A1; insured by MBIA
Student Fee Bonds, Series N and Series O: rated A1
Housing and Dining Bonds, Series 2009A, Series 2009B and Series 2010: rated A1
University: Diann McKee, Vice President for Business Affairs, Finance, and
University Treasurer, 812-237-3563
Advisor: John S. Vincent, John S. Vincent & Company, 312-332-1337
METHODOLOGY AND LAST RATING ACTION
The principal methodology used in assigning the rating was the Public University
Methodology, published in November 2006.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, public information, confidential and proprietary
Moody's Investors Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of assigning a credit rating.
Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.
Public Finance Group
Moody's Investors Service
Diane F. Viacava
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
CORRECTION TO TEXT, MAR. 18, 2011 RELEASE: MOODY'S ASSIGNS A1 RATING TO INDIANA STATE UNIVERSITY'S $8.7 MILLION OF STUDENT FEE BONDS, SERIES O; OUTLOOK REVISED TO STABLE FROM POSITIVE
Moody's Investors Service
250 Greenwich Street
New York, NY 10007