Fitch Rates Montclaire State University (NJ) Rev and Rfdg Bonds 'A'.

NEW YORK -- Fitch assigns an 'A' rating to New Jersey Educational Facilities Authority's revenue and refunding bonds, series 2006A, and refunding bonds, series 2006B. The bonds will be sold on behalf of Montclair State University (MSU). The preliminary plan of finance reflects the issuance of approximately $106 million of series 2006A bonds and approximately $11.5 million of series 2006B bonds. These par amounts could increase if market conditions facilitate the refunding of certain additional bonds and maturities. The series 2006 A and B bonds are expected to be insured by Ambac Assurance Corporation, whose insurer financial strength is rated 'AAA' by Fitch. The Rating Outlook is Stable.

The bonds are to be sold through negotiation by Lehman Brothers on or about March 29, 2006. Proceeds from the series 2006A bonds will be used to finance approximately $60 million of revenue-generating projects and $37 million of academic projects, fund capitalized interest during the construction phase, and advance refund a portion of MSU's outstanding series 1997D bonds.

Proceeds from the series 2006B bonds will current refund a portion of the series 1996C and 1996D bonds. The series 2006A and 2006B bonds are a general obligation of MSU, payable from all legally available funds. The university's outstanding bonds are also a general obligation of MSU. Certain bonds also contain a net revenue pledge of the university. These pledged net revenues may not be available for payment of debt service for the series 2006A and 2006B bonds. Following the refunding of a portion of these bonds, outstanding bonds secured with prior net revenue pledges are expected to decline to less than $38 million.

The 'A' rating is primarily supported by MSU's historical operating profitability, strong revenue growth, impressive undergraduate enrollment growth, and an increasingly prominent market position as the second largest public university in New Jersey's higher education sector. The university's strategically focused, results-oriented management team is strengthening the university's academic and operating profiles and its physical plant. Furthermore, budgeted historical surpluses, tuition and fee flexibility, and the anticipated revenue generated by recently completed projects and certain pending debt-financed projects provide an important cushion to support increased debt levels.

Fall 2005 headcount was 16,063, up 16% over fall 2001 enrollment levels, and the university is well on its way to attaining an enrollment goal of 18,000 by its centennial in 2008, particularly if recent initiatives to jumpstart graduate enrollment trends succeed. Between fiscals 2002 and 2005, MSU's total annual revenues, excluding capital gifts and grants, increased by over 36%, and operating margins averaged nearly 7%. This impressive performance reflects increased enrollment, growth in auxiliary enterprises, and higher tuition and fees to accommodate the university's planned capital expansion, enlarged faculty, and higher operating, maintenance and debt service costs. Beginning in fiscal 2006, operating margins are expected to moderate to about 4%. Thinner though positive surpluses are anticipated in the near term.

The primary credit concern is the university's relatively high pro forma debt burden. Following the issuance of the series 2006A and 2006B bonds, total outstanding debt is projected to increase to about $380 million, maximum annual debt service is estimated at $25.2 million in 2012, and would consume a high 11.8% of fiscal 2005's revenues. Funds available for debt service generates pro forma debt service coverage of 1.6 times (x) in fiscal 2005. These ratios could be exacerbated in the next two years if MSU moves forward with its capital plan. MSU has identified $77 million of future financing needs for two critical academic projects, and is proactively seeking funding through a proposed state general obligation (GO) bond issue for higher education. The proposed bonds are subject to approval by the governor, state legislature, and voters. Fitch currently rates New Jersey's GO bonds 'AA-'. In the event a GO bond issue is not passed (the last time the state issued GO bonds for public universities was in 1988), MSU intends to issue direct debt to finance these projects. Although Fitch stressed debt ratios to determine the affordability of the additional debt at this time, rating and outlook stability will ultimately hinge on the university's financial strength at the time of issuance.

MSU's available funds of about $60 million as of June 30, 2005, cover 30.5% of expenses and 15.8% of pro forma debt. These respective ratios are at the low range and below Fitch's medians for 'A' rated public universities. Concerns are partially mitigated by recent fundraising success toward a $50 million capital campaign, and the university's strong operating cash flow generation and tuition and fee flexibility.

Historically, state appropriations for higher education have been restrictive and budgetary pressures could limit future appropriations. MSU's direct appropriations and funding for fringe benefit costs totaled $71.4 million in fiscal 2005, and accounted for about one-third of revenues. State funding represented 41.3% of MSU's unrestricted revenues in fiscal 2002. As state direct appropriations remained relatively static, the percent of MSU's growing unrestricted revenues from state funds has declined, and the percent of unrestricted revenues derived from tuition and fees increased from 28.8% in fiscal 2002 to 37.5% in fiscal 2005. Other net student revenues from auxiliary activities contribute an additional 13% of unrestricted revenues in fiscal 2005. These growing revenue sources help to mitigate the negative impact of a tight state funding environment.

Montclair State University was founded in 1908 as a two-year Normal School. The university is located on a large and accessible suburban campus in Montclair, New Jersey.

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