Fitch Affirms Furman University (SC) Revenue Bonds at 'AA-'; Outlook Stable

Fitch Ratings affirms its 'AA-' rating on $96.6 million of the Educational Facilities Authority for Private Nonprofit Institutions of Higher Learning, South Carolina (the authority) bonds issued on behalf of Furman University (Furman, or the university).

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of the authority, secured by the general obligation of Furman University.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: Furman's 'AA-' rating continues to reflect its sound liquidity position, consistently positive operating performance (inclusive of the full endowment payout), and adequate debt service coverage (including balloon maturities). Offsetting the aforementioned strengths is Furman's competitive operating environment driving high tuition discounting levels, a fairly aggressive capital structure, high but manageable debt burden, and exposure to variable-rate debt and its related risks.

BALANCE SHEET STRENGTH: Consistent operating surpluses on an adjusted basis and improving financial market performance have been instrumental in rebuilding the university's level of available funds, or cash and investments not permanently restricted. The established and successful fundraising culture is viewed favorably.

ENROLLMENT STABILITY: Student headcount remained relatively flat in fall 2013, while student selectivity strengthened due to adjusted admission standards. Further enrollment growth remains somewhat limited by physical plant constraints and an on-campus residency requirement for all students, as well as the desire to maintain desired class sizes.

LIMITED REVENUE DIVERSITY: Similar to many other private universities, Furman is highly dependent on student-generated revenues and, as a result of its competitive operating environment, discounts a significant portion of student tuition annually. Conservative budgetary practices and cash flow management strategies throughout the year help to mitigate these concerns.

RATING SENSITIVITY

FINANCIAL RESOURCES: A material shift in Furman's balance sheet resources, its primary major financial strength, could drive a rating change.

ENROLLMENT MANAGEMENT: An inability to maintain enrollment stability could challenge operating performance, which would negatively impact the rating.

CREDIT PROFILE:

Furman was founded in 1826 and is a private, co-educational liberal arts institution located in Greenville, South Carolina. In fall 2013, Furman enrolled approximately 2,788 undergraduate and 131 graduate students on its 750-acre campus. Furman offers majors and programs in 42 subjects. Most of Furman's undergraduates are from the South Atlantic region, but more than 40 states and 15 foreign countries are represented in its student population.

A national search is underway for Furman's 12th president, since the former president resigned for personal reasons in July 2013, after serving Furman since July 2010.

The Board elected an interim president who is expected to serve until a new president is named, which is expected prior to July 2014. The interim president is a longstanding member of the Furman board and served as board chair for two years. Fitch views as positive the interim president's longstanding board association, support for Furman's current strategic plan, and the longevity of the current leadership team, which provides stability. All other cabinet members remain in place providing continuity in the budgeting process.

STABLE BUT LIMITED ENROLLMENT; IMPROVED SELECTIVITY

Furman's fall 2013 total headcount enrollment was essentially flat at 2,919 students. Modest growth in full-time undergraduate headcount, accounting for the majority of students, aided in offsetting the decline of part-time undergraduate and graduate headcount, which makes up a very small portion of student headcount.

Furman adjusted its admission standards, with shifts in tuition discounting strategies, from fall 2011 to fall 2013. After a relatively large incoming freshman class of 794 students in fall 2011 (versus a 10-year average of 667 between 2003 and 2013), Furman's entering class dropped 12.2% to 697 students in fall 2012. Furman strategically lowered the discounting rate for first-time students in fall 2012, causing freshmen yield to drop that same year. In fall 2013, Furman's modified admissions strategies targeted an increase in better qualified out-of-state students less reliant on student aid. The discounting rate was raised again just for first-time students in fall 2013 which led to the 8.9% uptick in matriculating freshmen in fall 2013 to 759 freshmen students. As a result, Furman's acceptance rate improved to 63.8% in fall 2013, from a high 83% in fall 2011, which is more in-line with pre-recession levels. However, matriculation rates are still low, reflecting the competitive environment in which it operates.

Strong student quality remains a positive credit factor which drives Furman's high retention and graduation rates. The stable enrollment is further supported by high student retention (the five-year average is 90%). Furman plans to maintain total undergraduate headcount of no more than approximately 2,800 FTEs, recognizing capacity limitations of its existing physical plant, notably student housing, and its small class size represented by low student-to-faculty ratios. With all but a few exceptions, Furman requires all of its students to reside in on-campus housing.

Ongoing efforts to fine-tune admission standards and tuition pricing strategies, with the goal of maintaining a relatively stable freshman class size and high student quality, will be key to maintaining rating stability. Since Furman relies heavily on student-generated revenues (net tuition and fees, and auxiliary revenues accounted for 71% of fiscal 2013 unrestricted operating revenues), close attention to enrollment management is essential.

COMPETITIVE OPERATING ENVIRONMENT

Given the competitive operating environment, Furman remains affordable by discounting a significant portion of student tuition annually. Favorably, Furman's sticker price for fall 2013 is not the highest of its peer group but its operations could be challenged by several lower-priced public alternatives. To remain competitive, Furman approved a 4% increase in tuition and fees (including room and board charges) in fall 2013, which was lower than the 5% increase approved in the prior year.

SOLID OPERATIONS

Historically, Furman's unrestricted operating margin, inclusive of the investment spending policy payout, has been positive. Margins improved to 4.5% in fiscal 2013 from 3.4% in fiscal 2012, as a result of stability in enrollment, regular tuition increases, as well as a rebound in financial markets and ongoing expense containment. Endowment payout (which is 4.5% of the endowment base), established in 2000, along with investment and interest income comprised about 18% of Furman's revenues in fiscal 2013 which is high but consistent with prior years.

The university expects similar operating results for fiscal 2014 as the result of several cost containment measures. Favorably, adjusted net income from operations provides adequate coverage of maximum annual debt service (MADS) of 1.3x despite an uneven amortization schedule. Average annual debt service coverage is stronger at 3.1x.

LIQUIDITY PROVIDES FLEXIBILITY

Operating surplus generation, recovery in global financial markets, and prudent resource management enable Furman to maintain its primary financial strength - its level of balance sheet resources. As of fiscal year end (FYE) 2013, the university's available funds increased by 9.7%, to $339 million. As a percentage of both operating expenditures and leverage, available funds represented a solid 255.2% and 331.4%, respectively. The university's track record of closely managing and monitoring its liquidity needs offsets its moderately aggressive allocation to alternative investments (36.7%).

Furman completed its 'Because Furman Matters' capital campaign in December 2013, exceeding its $400 million goal by $6 million, and has collected $305 million in commitments toward that goal to date. The majority of funds raised will be added to the endowment for scholarships, with remaining funds supporting operations and capital projects. Despite challenges in annual giving over recent years, Fitch believes Furman's established and successful fundraising culture, with a 77% alumni participation rate, provides additional financial flexibility.

AGGRESSIVE BUT MANAGEABLE CAPITAL STRUCTURE

The university's capital structure is fairly aggressive, with considerable exposure to variable-rate debt, interest rate hedge, and non-level amortizing debt instruments. As of FYE 2013, Furman's outstanding debt totaled $105.9 million, including non-cancellable operating and capital leases and lines of credit. Approximately 40% of the portfolio is variable-rate demand bonds, with approximately 13.4% of this exposure synthetically fixed. Management's experience in monitoring the liquidity needs of the debt portfolio helps to offset the risks attendant with floating-rate debt and associated swaps.

Furman's amortization schedule includes several large bullet payments, including $11 million occurring in fiscal 2016 and $16.3 million in fiscal 2027. MADS in 2027 includes a high pro-forma debt burden of 11.3% based on fiscal 2013 adjusted operating revenue. Assuming the bullet payment is evenly amortized through final maturity of outstanding debt, the debt burden declines to a more manageable 4.8%.

Furman expects to make the required balloon payment in fiscal 2016 with internal resources or externally with capital markets refinancing, depending on its cash position, desired capital structure, and overall financial flexibility at the time. As implied by its rating level, Fitch believes Furman has the financial wherewithal to manage refinancing risk either with internal resources or externally through a capital markets refinancing.

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

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria' (May 10, 2013);

--'Fitch Rates Furman University (SC) Revenue Bonds 'AA-'; Outlook Stable'

(Feb. 8, 2012).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=814030

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Nancy Faingar, [phone]
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
James George, [phone]
Director
or
Committee Chairperson
Joanne Ferrigan, [phone]
Director
or
Media Relations, New York
Elizabeth Fogerty, [phone]
[e-mail]