Fitch Rates North Carolina A&T State University Revs 'A+'; Outlook Stable

Fitch Ratings has assigned an 'A+' rating to approximately $88.3 million of revenue bonds of the Board of Governors of the University of North Carolina (BOG) on behalf of North Carolina Agricultural and Technical State University (NCA&T).

The bonds are expected to be sold via negotiation on or about the week of Dec. 15, 2014. Proceeds will be used to finance the construction, equipping and furnishing of a student life complex, pay capitalized interest, and pay costs of issuance.

The Rating Outlook is Stable.

SECURITY

General revenue bonds (GRBs) are secured on a parity basis by and payable from legally defined available funds of NCA&T, including unrestricted general fund balances and unrestricted quasi-endowment fund balances ($52.3 million during fiscal 2013). Specifically excluded from pledged revenues are state appropriations, tuition, special facility revenues and restricted funds. The series 2014 bonds are not expected to have a debt service reserve fund or a mortgage lien on the financed property.

KEY RATING DRIVERS

'A+' RATING ASSIGNED: The 'A+' primarily reflects NCA&T's demand niche as one of the nation's largest historically black colleges and universities (HBCU) with diverse programmatic offerings and relatively steady enrollment trends; a low debt burden that supports adequate debt service coverage; and significant, albeit recently pressured, state operating and capital support. Counterbalancing factors include a history of uneven GAAP operating margins, somewhat narrow balance sheet strength, and political limitations on tuition flexibility.

STABLE MARKET POSITION: NCA&T is a regional public university with a diverse set of programmatic offerings, which help insulate it from reduced demand in a particular field of study, and is particularly well-regarded for its school of engineering. Total headcount enrollment is relatively steady and benefits from the university's recently enhanced ability to recruit out-of-state students and ongoing efforts to improve student retention.

LOW DEBT BURDEN: The proposed issuance will increase total financial leverage; however, debt carrying charges are expected to remain low, supporting continued debt affordability. The BOG approved a new student fee that is part of legally defined available funds for debt repayment. Post issuance, there are no near-term debt plans.

ADEQUATE FINANCIAL PROFILE: NCA&T's financial profile is characterized by a track-record of uneven GAAP margins and a limited financial cushion. The revenue base is relatively diverse, although the primary streams face limitations on growth. Some comfort is gained from management's demonstrated commitment to contain expense growth, which is supported by the absence of collective bargaining units on campus.

RATING SENSITIVITIES

WEAKENED FINANCIAL PROFILE: Issuance of additional debt without commensurate growth in revenues and financial resources would likely exert negative rating pressure, as would slimmer operating results that drive weakened debt service coverage.

PRESSURED FOUNDATION-RELATED STUDENT HOUSING: Significant financial or operational stress at NCA&T Foundation's housing units could negatively pressure the university's credit profile.

CREDIT PROFILE

Established in 1891, NCA&T is a public, co-educational, HBCU within the 17-institution North Carolina public university system (one of two land grant designated institutions in the state). The university sits on approximately 200 acres in Greensboro, North Carolina and also maintains a 492-acre working and producing farm. Its regional accreditation with the Southern Association of Colleges and Schools - Commission on Colleges was most recently reaffirmed in 2010 for a 10-year term. Based on preliminary fall 2014 enrollment numbers, NCA&T is the largest HBCU in the nation.

The university offers 57 undergraduate degree programs, 30 master's degree programs, and nine doctoral programs through its two professional colleges and seven schools. In addition, a state grant was received in fiscal 2010-2012 to fund the construction of a Joint School of Nano-science and Nano-engineering, an academic collaboration between NCA&T and the University of North Carolina at Greensboro.

STABLE MARKET POSITION

NCA&T is a regional, mid-sized public university with a diverse set of programmatic offerings, which help insulate it from reduced demand in a particular field of study, and is particularly well-regarded for its school of engineering. With the BOG's approval, management has phased out certain underutilized programs in recent years while adding new academic offerings, primarily at the graduate level, to support continued student demand.

Preliminary fall 2014 headcount enrollment stood at 10,734, or 1.6% ahead of the prior year and 0.6% below fall 2010. Overall headcount stability supported by healthy freshmen-to-sophomore retention rates (79.7% in fall 2013), with modest dips primarily reflecting fewer entering freshmen students and steadily improving graduation rates. Graduate headcount enrollment dipped by a sizeable 10% in fall 2014, which is inconsistent with historical trends. Importantly, the fall 2014 decline of graduate enrollment had only a modest impact on total headcount enrollment as the student body is predominantly undergraduate (85.8% in fall 2014).

In line with its mission, a majority of the university's students are from North Carolina. Historically, the university had an 18% cap for out-of-state freshmen, although the school of engineering, one of the state's three engineering colleges was not subject to the cap. In January 2014, the Board approved the NCA&T's proposal for a 7% increase on the cap for out-of-state freshmen beginning for fall 2014. Fitch views the action as a credit positive as it will help boost student-generated revenues given the sizeable difference between resident and non-resident tuition and further diversify the geographic composition of the enrollment base.

LOW DEBT BURDEN

On an aggregate basis, the university's debt profile (excluding foundation-related debt discussed below) is composed of fixed-rate, fully amortizing securities, which is viewed favorably by Fitch. Based on a preliminary debt schedule, the university's aggregate maximum annual debt service (MADS) of around $7.7 million (fiscal 2021) represented a low 3% of Fitch-adjusted fiscal 2013 unrestricted operating revenues. Institutional MADS coverage from fiscal 2013 net operating income was weak at 0.9x; however, it's important to note that the university only began to collect revenues derived from that new student fee that will be available to cover debt service on the series 2014 bonds in fiscal 2014. The university's current debt service coverage in fiscal 2013 was a satisfactory 1.5x.

NCA&T's foundation had $29.3 million of series 2004A fixed-rate bonds and $21 million of series 2004B variable rate demand bonds outstanding as of June 30, 2013. At June 30, 2013, around 44% of the series 2004B bonds was hedged through a swap with Wells Fargo N.A. (rated 'AA-/F1+ by Fitch). The bonds mature on June 1, 2035, whereas the termination date of the swap is March 1, 2019. No collateral posting is required on the swap. The tender option on the Foundation's series 2004B bonds is supported by a direct pay letter of credit agreement with Wells Fargo, N.A. that is reviewed for renewal on an annual basis.

While the series 2004A and series 2004B bonds are not a legal obligation of the university, Fitch believes that management has strong incentive to support the project given its strategic importance to the university (foundation-related housing represented 34% of available beds on campus in fall 2013). At present time, credit risk associated with foundation-related debt is mitigated by the good economic performance of the on-campus project. Debt service coverage on the bonds was 1.7x in fiscal 2013 and averaged 1.57x between fiscal 2010 and 2012.

ADEQUATE FINANCIAL PROFILE

The university's financial profile is characterized by a track-record of breakeven to somewhat negative GAAP-based operating margin (averaging -0.6% between fiscal 2011 and 2013), although consistently positive on a cash basis when adding back the annual depreciation expense. Fitch expects the operating margin for public colleges and universities to be break even on a GAAP basis. The university does receive capital support from the state which is available to cover deferred maintenance; however, this funding source has been uneven in recent years. The state did pass a bond package in 2000 for the improvement and expansion of facilities in the UNC System, which helped NCA&T to complete major renovation projects on campus.

Net tuition/fees and state appropriations are the two largest funding sources in the operating budget, although Fitch notes that NCA&T has become less reliant on the latter. Despite this downward trend, Fitch still considers state appropriations to be a significant source of operating revenue; subsequently, the financial condition of the state continues to be an important credit consideration to NCA&T since reductions in the state budget could adversely affect funding levels. Federal grants and contracts, primarily tied to sponsored research and the Pell Grant, also represent important revenue streams.

In Fitch's view, the revenue base is relatively diverse, although the primary streams face some limitations on growth. Specifically, funding streams face some pressure from political limitations on tuition flexibility, a challenging state funding environment, and constrained federal research dollars. Some comfort is gained from management's demonstrated commitment to containing expense growth, which is supported by the absence of collective bargaining units on campus.

Positive operating cash flow has supported an adequate level of balance sheet flexibility. Available funds, defined by Fitch as cash and investments less certain restricted net assets, totaled approximately $53.6 million in fiscal year-end 2013. Cash and cash equivalents included approximately $8 million in unspent bond proceeds. Adjusted for unspent bond proceeds, available funds totaled around $45.6 million (the calculation of available funds under the GRB indenture differs from Fitch's calculation of available funds, which it uses as a measure of balance sheet strength).

NCA&T's financial cushion (adjusted for unspent bond proceeds) relative to operating expenses is narrow, but comparable to other Fitch rated public colleges and universities in the 'A' rating category, representing 17.6% of fiscal 2013 operating expenses. Available funds relative to pro-forma long-term debt including and excluding foundation-related debt were a slightly stronger 29.4% and 39.9%, respectively.

The separately incorporated NCA&T foundation held approximately $11 million in current cash and investments and around $4.4 million in endowed investments at fiscal year-end 2013. Fitch does not include these monies as part of its available funds calculation but recognizes they ultimately benefit the university.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

-- 'U.S. College and University Rating Criteria' (May 12, 2014);

-- '2013 Median Ratios for U.S. Public Colleges and Universities' (July 16, 2014);

-- 'Fitch Rates North Carolina's $139MM GO Bonds 'AAA'/Stable' (April 3, 2014).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

2013 Median Ratios for U.S. Public Colleges and Universities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752077

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=912954

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