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Fitch awards solid AA to IHL borrowing

Aruba-Fitch-RatingsThe candidate selected to replace the departing Hank Bounds as Mississippi’s commissioner of higher education will inherit a sound and stable borrower profile for the State Institutions of Higher Learning.

In a Jan. 13 ratings report, Fitch Ratings Service maintained the AA rating on a new issuance of revenue bonds the IHL expects to sell the week of Jan. 26.  The AA rating, which IHL has maintained since April 30, 2010, denotes a “very strong capacity to meet” financial commitments, Fitch says.

The new $50 million University of Mississippi Educational Building Corp. revenue bonds will pay for parking and student housing at the university’s Oxford campus as well as build and equip club level seating at UM’s Vaught-Hemingway Stadium. One bond for $35 million will go for the parking and the housing; the other one of $15 million covers the stadium seating.

In addition to state government appropriations, funding sources for bonds will include net tuition fees, auxiliary receipts and sales and service revenues. Revenue classified as “other operating revenue” and “unrestricted net assets” will also be used, according to Fitch.

Fitch said the AA rating reflects a sound and stable financial profile as shown by a positive operating performance, a satisfactory level of available funds relative to operating expenses and debt, a diverse revenue base and state government operating and capital support. A “stable” outlook accompanies the AA rating.

Fitch since May 2012 has maintained a best quality grade of F1+ on the IHL’s short term borrowing, indicating an exceptionally strong capacity to meet bond obligations over the next 12 months. “The F1+ rating is based on the availability of adequate, highly liquid, highly rated securities to cover the maximum potential demand,” Fitch said, referring to the $50 million in debt.

The outlook on State of Mississippi bond repayment capacity is weaker than that of the IHL.

While Fitch assigns a strong borrower rating of AA+ to State of Mississippi revenue bonds, the rating service has had a “negative” outlook for the bonds since late 2013.

Fitch noted that the State Institutions of Higher Learning maintained its positive credit results in fiscal 2010 through 2013 “even in a pressured state-funding environment which Fitch regards favorably,” the ratings agency said. It noted that in the 2010-2013 period, state funds declined 11 percent.

Fitch further noted that since 2011, state government has seen a decline in federal grants and contracts.    These revenue sources made up 8.4 percent of the state’s fiscal 2014 operating revenues, Fitch said.

Despite the fiscal strains from federal cutbacks and congressionally-mandated federal funds sequestration, state government operating appropriations climbed 5.5 percent in fiscal 2014 and another 6.3 percent in the current fiscal 2015.

By contrast, the IHL has benefited from a diversity of revenue sources. In 2014, operating revenue included operations appropriations of 22.6 percent. Healthcare operations accounted for 29 percent and grants and contracts 12.9 percent. The grants and contracts category includes federal scholarship programs and student/auxiliary fees which accounted for 23.9 percent of revenue.

“Management expects system-wide operating performance for the fiscal year ending June 30, 2015 to again be balanced,” the Fitch report said.

Fitch further looks favorably at the balance IHL has between available funds of $1.6 billion (cash and investments) and its operating expenses. Those expenses accounted for 37.8 percent of available revenue on June 30, 2014, according to Fitch.

In detailing the IHL’s overall debt, Fitch said the system has debt liabilities of about $1.3 billion that includes bonds, notes, non-cancelable operating leases and capital leases.

“The system’s debt portfolio is structured conservatively, with front-loaded amortization and mostly fixed-rate debt,” the ratings agency said.

Meanwhile, the Mississippi Institutions of Higher Learning will soon be looking for a new commissioner of higher education, a position that oversees the state’s eight public universities. Commissioner Hank Bounds is leaving the post he has held since 2009 to become president of the University of Nebraska.

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