Fitch Ratings assigns an 'A+' rating to approximately $94.5 million of series 2015 higher education revenue bonds to be issued by Coastal Carolina University (CCU, or the university).

The fixed-rate bonds are expected to sell competitively on or around Feb. 10. Bond proceeds will be used to acquire existing student housing facilities that CCU currently leases from the CCU Student Housing Foundation (the foundation) and to pay associated costs of issuance. At the same time, Fitch affirms the 'A+' ratings on the following series of CCU revenue bonds:

--$35.5 million higher education revenue bonds, series 2014;

--$54.7 million higher education revenue bonds, series 2013.

The Rating Outlook is Stable.

SECURITY

Revenue bonds are a special limited obligation of CCU, payable solely from and secured by a pledge of net revenues. Pledged revenues include all revenues of the university except revenues derived from appropriations received from the general assembly of the state and institution tuition moneys collected to pay debt service on state institution bonds (rated 'AAA' by Fitch) issued on behalf of CCU.

KEY RATING DRIVERS

SOUND OPERATING PERFORMANCE: The 'A+' rating primarily reflects CCU's consistently positive, but narrowing, operating results that have been driven by stable to growing enrollment; and an adequate balance sheet cushion. Counterbalancing credit factors include an atypically high reliance on student-generated revenues for a public university and a high pro forma debt burden.

STABLE STUDENT DEMAND: Enrollment has grown steadily over the past several years as demand remained strong from both in- and out-of-state applicants. The university's revenue mix benefits from out-of-state tuition levels which contribute to the university's positive to breakeven operating results.

HIGH, BUT MODERATING DEBT BURDEN: CCU's financial leverage increased considerably in recent years as the university continued to build out its physical plant. This has resulted in a high pro forma debt burden; however, most of the university's debt-financed projects have been related to student housing that is expected to be self-supporting. Moreover, by terminating its lease with the foundation, CCU is considerably reducing its annual debt service costs and pro forma debt burden.

LIMITED RELIANCE ON STATE SUPPORT: State appropriations are not a significant source of operating revenue, resulting in CCU's high tuition dependency for a public institution. However, management has successfully managed through cycles of state cuts (South Carolina GOs rated 'AAA' by Fitch) with steady enrollment growth and periodic tuition and fee increases. Moreover, CCU benefits from a local optional penny sales tax that provides an additional, steady source of income to fund capital needs.

RATING SENSITIVITIES

ENROLLMENT STABILITY: Given CCU's high concentration in student-generated revenues, stable to growing enrollment levels will be instrumental to the university generating positive to breakeven operating margins and sufficiently meeting its annual debt service obligations.

ADDITIONAL DEBT: Based on CCU's limited balance sheet cushion relative to outstanding debt and its high pro forma debt burden, the university has limited additional debt capacity. Additional debt without a commensurate increase in available financial resources could pressure the rating.

CREDIT PROFILE

Located in Conway, SC, CCU was founded in 1954 by Horry County citizens as a two-year college under the College of Charleston. In 1958, benefitting from a tax levy referendum, CCU became a campus of the University of South Carolina system and subsequently started awarding four-year baccalaureate degrees in 1974. It became an independent state supported institution in 1993 and offers undergraduate degrees in 65 fields of study, seven master degree programs and one doctoral program.

ENROLLMENT GROWTH DRIVES OPERATIONS

Following modest growth in fall 2013, enrollment grew measurably in fall 2014. Total headcount grew to 9,976 students, up 5.3% from fall 2013 and up 14.6% since fall 2010. Full time equivalent (FTE) enrollment grew to 9,421, up 14.6% over the same five-year period. CCU's goal is to reach 10,000 students by fall 2018, which Fitch believes is achievable based on recent trends. Growth is mostly attributed to undergraduate students which make up the vast majority of enrollment. Graduate student enrollment was also flat to slightly up, which is counter to the national trend. Undergraduate headcount grew to 9,364 in fall 2014, with 9,105 FTE's, compared to 8,867 and 8,564, respectively in fall 2013. Graduate headcount was flat in fall 2014 at 612 students, with FTEs up very slightly to 316 students.

New facilities and recent athletic program success have contributed to CCU's healthy demand trends. Freshmen applications have increased substantially, while the university's acceptance and matriculation rates averaged a modest 70% and 26%, respectively, over the past five academic years. CCU's resident tuition remains below the state average for teaching institutions ($10,140 vs. $10,511) though it remains conscious of affordability. It kept undergraduate resident tuition flat from fall 2011 to fall 2013, but increased tuition by 3.9% to $10,140 for the 2014-2015 academic year partly in response to the lower level of state appropriations received in recent years.

STUDENT HOUSING DEMAND

Due to enrollment growth over the past several decades and CCU's transition to a traditional four-year institution, the university has been investing in student housing. About 34% of total headcount resides on campus, with freshmen and sophomores required to live on campus. Due to a growing need for student housing, CCU undertook a project that will add a total of 1,274 on-campus beds by fall 2016. The project is currently on time and within budget, with the first phase expected to be complete by July 2015 and the second phase by July 2016. Out-of-state students typically make up nearly half of CCU's student population, which has had a positive impact on its financial performance.

The series 2015 transaction, which was being contemplated by CCU at the time of Fitch's last review of the university in May 2014, consists of the university acquiring the 2,079-bed apartment style University Place from the foundation. CCU currently leases the facility from the foundation, so the current lease payment will effectively be replaced by debt service associated with the series 2015 bonds. Moreover, annual debt service is expected to be significantly less than the lease payments being paid by the university. Fitch views this positively as it will lower CCU's presently high pro forma debt burden; Fitch includes the lease payment in its leverage calculations. The facility, located about one half mile from campus, is already managed by CCU as part of its overall housing system and remains fully occupied. Similar to CCU's existing housing facilities, University Place is fully self-supporting.

POSITIVE BUT NARROWING OPERATING PERFORMANCE

CCU's fiscal 2014 operating margin, while on budget, softened to 0.3% (or breakeven) from 2.9% in fiscal 2013. The margin decline relative to fiscal 2012 and before when CCU generated double-digit margins was due primarily to CCU taking on the triple-net capital lease for University Place in fiscal 2013. Further contributing to fiscal 2014's performance was relatively flat undergraduate student growth, coupled with no tuition increase, and a slight cut in state appropriations. However, the rebound in undergraduate enrollment growth in fall 2014 along with the tuition increase should bode well for fiscal 2015 performance. State appropriations also increased very modestly. CCU's management reported that fiscal 2015 operating revenues are currently ahead budget and they expect a fiscal year-end result better than fiscal 2014.

The university's positive to breakeven operations are somewhat tempered by its concentration in tuition, fees and auxiliary revenues for operating support (71% of fiscal 2014 operating revenues), which is relatively high for a public institution. State appropriations represented just 5.8% of operating revenue. CCU is also supported by a property tax millage within Horry County (GOs rated 'AA+' by Fitch) and by a portion of a county-wide local option sales tax collected through fiscal 2024, which mitigated the impact of state funding cuts in recent years and helps to fund capital needs.

ADEQUATE FINANCIAL CUSHION TEMPERED BY HIGH DEBT BURDEN

Balance sheet resources remain limited but adequate for the rating category. Available funds, defined as total cash and investments less non-expendable and certain expendable restricted net assets, totaled $132.3 million as of June 30, 2014 and represented an adequate 75.1% of fiscal 2014 operating expenses ($176.2 million) and 50.7% of pro forma debt (about $260.8 million). Debt includes university revenue bonds (about $201.2 million on a pro forma basis) and state institution bonds ($59.7 million).

CCU's debt composition is conservative. All revenue bonds are fully amortizing and fixed-rate with a somewhat front-loaded debt service schedule, which Fitch views favorably. Following issuance of the series 2015 bonds, total debt outstanding will be reduced to about $260.8 million from $311.3 million as of June 30, 2014. The reduction will result from CCU terminating the University Place capital lease, which had a $145 million net liability as of June 30, 2014, and replacing it with the $94.5 million series 2015 bonds, as well as some annual principal amortization.

The university's new maximum annual debt service (MADS) will total about $17.8 million (fiscal 2018), with average annual debt service of roughly $12.8 million. These figures will reduce from about $24 million and $16.5 million, respectively, prior to the series 2015 transaction. MADS on the series 2015 bonds is nearly level, averaging $5.2 million annually and saving about $75 million over the 30-year life of the bonds (or about $2.8 million annually). The large savings is largely due to lease payments having been structured to equal 1.3x debt service on the foundation's bonds that initially financed University Place.

CCU's pro forma debt burden remains high, with MADS consuming 10.1% of fiscal 2014 operating revenues ($176.6 million). However, the burden is down from about 14% prior to the series 2015 transaction. Partially offsetting the high burden is CCU's consistent generation of adequate MADS coverage from net operating income. MADS coverage was at or just over 1x in each of the past five fiscal years (1.1x in fiscal 2014). Fitch notes positively that CCU's debt-financed housing facilities are expected to be self-supporting, which further mitigates the high burden. CCU has no significant additional debt plans at this time, but given its limited balance sheet cushion and narrowing operating margin, incurrence of additional debt without a commensurate increase in available resources could pressure the rating.

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

Applicable Criteria and Related Research:

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

--'Coastal Carolina University, South Carolina' (May 15, 2014);

--'Fitch Rates South Carolina's $129MM GOs 'AAA'; Outlook Stable' (May 14, 2014);

--'Fitch Affirms Horry County, SC's GO Bonds 'AA+'; Outlook Stable' (Oct. 2, 2013).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

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

Coastal Carolina University, South Carolina

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747419

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=964695

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