Fitch Rates FL Atlantic Univ Housing Revs 'A'; Affirms Outstanding Debt.

NEW YORK -- Fitch Ratings assigns its underlying 'A' rating to Florida Board of Governors $27.8 million Florida Atlantic University (FAU) housing revenue bonds, series 2006A. Fitch also affirms the underlying 'A' ratings on $56.5 million of housing system revenue bonds, series 2000 and 2003. The Rating Outlook is Stable.

Series 2006 bond proceeds will be used to finance the construction of a 600-bed residence hall on the Boca Raton campus, demolish an older 186-bed residence hall, fund capitalized interest, and pay costs of issuance. The bonds are secured by net pledged revenues of the housing system. The University has set aside approximately $100,000 to repay all maturing prior lien housing bonds on July 1, 2006. A debt service reserve fund requirement will be satisfied with a surety bond from a bond insurer. The bonds are expected to be insured and sell competitively on 18-hour notice beginning the week of July 10 by the Florida Division of Bond Finance.

The 'A' rating on the housing system bonds is supported by the financial viability and adequate debt service coverage generated by the integral and self-supporting housing systems, strong student demand, and FAU's credit profile. Full-time equivalent (FTE) enrollment at the university's main Boca Raton campus has grown 33.7% since fall 2001, prompting the need for additional housing. The system's 1,916 beds house just over 15% of the campus's 12,347 students (85% of FAU's total student FTEs). The housing system has a long track record of over 99% occupancy, strong double-digit operating margins, debt service coverage of over 1.3 times (x) for the last five years, and a 99% fee collection rate.

Unaudited 2005 financial results reflect gross revenues of the housing system of nearly $10 million, an operating surplus of $1.7 million, and available cash and investments of $8.2 million (equivalent to 98% of operating expenses). Based on Fitch's computation, FAU's actual debt service coverage totaled 1.33x. Financial performance was below prior projections in 2005 due to higher expenses and a non-cash loss related to the disposal of fixed assets, but is trending higher in fiscal 2006. Projections for the 2006A project are based on 95% occupancy, and reflect maximum annual debt service (MADS) coverage of about 1.5 times in fiscal 2008, the first full year after project completion. Significant growth in FTE students, the housing system's 99% occupancy rate, a wait list of over 300 freshmen, and the opportunity to enforce on-campus living requirements supports the need for additional housing. Moreover, housing fees are below rental rates in the affluent Boca Raton community. Debt levels are manageable; however, debt burden is expected to rise within the next three years with the planned expansion of the housing system. Fitch will assess the impact of this additional debt at the time of issuance.

FAU's fall 2005 headcount enrollment of 25,994 is up 9.1% since fall 2001 and FTE has increased 13% to 14,663. Management projects that headcount will reach 30,000 and student FTEs will grow to 16,533 by fall 2009. Fitch believes FAU's prospects for continued growth are reasonable given the state's projected growth in the number of high school graduates, new programs, and other strategic initiatives which should also help to diversify the enrollment mix (FAU's enrollment is heavily weighted toward in-state undergraduate students).

FAU's credit profile includes operating losses for the past four years, limited liquidity, and low debt burden. Operating deficits for fiscals 2004 and 2005 totaled negative $28.1 million and negative $23.7 million, respectively. Reported deficits, which include depreciation expenses, were exacerbated by the state's reallocation of funding between general and capital appropriations in fiscal 2004. Fiscal 2005's deficit is rooted in the incurrence of expenses eligible for capitalization and related to prior year grant revenues, a divisional upgrade for its athletics program, and additional student scholarships. FAU's enrollment mix also limits profitability. Management expects near-term performance to improve aided by an estimated 13% increase in state appropriations for 2007. New masters and doctoral programs, and strategic initiatives with local universities, a hospital, and with Scripps Research Foundation (rated 'AA-' by Fitch), which will operate its satellite FL division on FAU's Jupiter campus, are expected to diversify enrollment and augment revenue growth.

Notwithstanding operating losses, FAU's net assets increased in each fiscal year with the cumulative receipt of $258 million of Public Education Capital Outlays (PECO) and other capital appropriations. Available funds (cash and investments that are unrestricted) totaled $71.2 million as of June 30, 2005, and covered 56% of pro forma debt and 18% of operating expenses. About 40% of FAU's operating revenues comes from state appropriations and alleviates the need for significant cash reserves (the state's GO bonds are rated 'AA+' by Fitch). FAU's legally separate foundation holds a $151 million endowment, and FAU plans to launch a capital campaign in the near term to help support scholarships and student financial aid.

FAU's pro forma outstanding debt will total $126.5 million. MADS for all of FAU's direct debt and non-cancelable operating leases would consume a very light 2.6% of fiscal 2005's revenues. Due to the university's negative overall operating performance there is no pro forma MADS coverage. In addition to weak historical operating results, credit risks include a lack of geographic enrollment diversity, and increased competition for state funding. Fitch believes that the University has the operating flexibility to adjust discretionary fees and reduce operating expenses to improve overall financial performance. Therefore, FAU's failure to generate stable and balanced operating performance over the near term could lead to a negative change in the Outlook and or rating.

FAU is one of 11 institutions of public higher education in the State University System of Florida (currently rated 'AA' by Fitch).

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