Fitch Ratings has upgraded the rating on Illinois Institute of Technology's (IIT) $189 million of outstanding revenue bonds issued by the Illinois Finance Authority to 'BB' from 'BB-'.

The Rating Outlook is Stable.

SECURITY

A note secures IIT's obligations under a loan agreement with the authority. The university's obligation pursuant to the note is a general obligation. The authority issued the bonds and loaned the proceeds to IIT.

The authority pledges and assigns its interest and rights in the IIT loan agreement and note to the trustee. IIT makes payments directly to the trustee in an amount sufficient for debt service.

A cash-funded debt service reserve provides additional bondholder security.

KEY RATING DRIVERS

IMPROVED FINANCIAL POSITION: Recent improvement in IIT's structural balance and liquidity position drive the rating upgrade. Operating margins turned slightly negative in fiscal 2014, after two years of more favorable results. However, continued tuition revenue growth and a lessening reliance on endowment fund draws are indicative of a strengthened financial position. Improved available funds ratios compare favorably to similarly-rated institutions.

MANAGEABLE DEBT BURDEN: Stronger financial operations have enabled IIT to produce pro forma maximum annual debt service (MADS) coverage averaging 1.6x over the past three fiscal years, including 1.3x in fiscal 2014. Moreover, its debt burden remains manageable, with MADS consuming a moderate 6.1% of fiscal 2014 unrestricted operating revenues.

IMPROVING FINANCIAL CUSHION: Improved operations and favorable investment returns have benefitted IIT's available funds ratios. Available funds equaled 25.7% and 32.8% of fiscal 2014 unrestricted operating expenses and total long-term debt, respectively. Both ratios, while still weak, are more than 3x improved since fiscal 2012.

MIXED STUDENT DEMAND: Overall stable enrollment is composed of healthy undergraduate growth and declining graduate trends, particularly law, which Fitch notes is consistent with national trends. Freshman retention ratios are strong.

RATING SENSITIVITIES

SUSTAINED OPERATING IMPROVEMENT: Sustained improvement in IIT's operating performance, evidenced by positive operating margins driven by enrollment growth, could lead to additional positive rating action. Continued improvements in liquidity metrics would provide positive momentum.

STRUCTURAL IMBALANCE: A trend of negative operating margins, or a return to outsized reliance on endowment fund draws, could lead to negative rating action.

CREDIT PROFILE

IIT is a private, technical engineering institute established in 1940. The university operates five campuses in the Chicago metropolitan area with its main campus located four miles south of downtown Chicago.

IIT's board of trustees unanimously appointed Mr. Alan Cramb, the current provost and senior vice president for academic affairs, as president effective Aug. 1, 2015. The board noted Mr. Cramb's contributions to IIT's increased undergraduate enrollment growth and improved financial position in making the selection.

In a positive indication of its improved operating position, the university has met its financial responsibility standards pursuant to the U.S. Department of Education's (USDE) Student Financial Assistance programs. IIT had been on provisional status with the USDE, as of Fitch's prior rating in February 2014. IIT has met USDE financial thresholds in three of the past four years, including in fiscal 2014.

IMPROVING FINANCIAL OPERATIONS

IIT's operating position shows continued improvements. Operating margins have averaged breakeven since fiscal 2012, including a slight negative turn in fiscal 2014 to -1.5%. This follows six consecutive years of negative margins from fiscal 2006-2011. Moreover, excess endowment fund draws above its stated policy averaging more than $15 million annually during the prior period were more than one-third higher than the most recent three-year average. In effect, IIT has produced more stable operating results since fiscal 2012 while returning to its customary 5% endowment fund spending policy.

Management's multi-year financial turnaround plan focusing on various revenue enhancement and cost containment initiatives drives recent operating stability. Average annual operating revenue growth (5.2%) has outpaced operating expenses (2.3%) since fiscal 2010. Similar to many other private institutions, IIT's largest revenue source is student-generated revenue (60.2% of fiscal 2014 operating revenues), although grant and contract revenues provide significantly more revenue diversity than comparably-rated institutions.

Interim fiscal 2015 operating results through November 2014 ($22.1 million, net of depreciation expense), are ahead of the same period the prior year ($21.1 million), suggesting another year of near breakeven results. Consistently positive operating results would underscore the university's improved financial position.

OVERALL FLAT ENROLLMENT

Flat overall enrollment trends since fiscal 2010 potentially limit the rate of improvement in IIT's operating margin. Total enrollment increased by 3.3% during the period to 7,318. More broad, steady enrollment gains could ultimately contribute to stronger operating margins.

Healthy undergraduate growth totaling 13.5% since fiscal 2010 to 3,004 offsets slightly negative overall graduate enrollment (-2.8%), largely driven by a declining number of law school students that is consistent with national trends. IIT's law students represent approximately 11% of the total.

Incoming student admissions examination scores compare favorably with state and national averages. Average ACT scores (28) are seven points above the national average. Additionally, high freshman retention ratios averaging 92% since fiscal 2010 show little variation.

IMPROVING FINANCIAL CUSHION

Available funds provide IIT with a modest financial cushion. However, related ratios have improved greatly since fiscal 2012 and now compare favorably with similarly-rated institutions. The ratios of available funds to unrestricted operating expenses and long-term debt have improved to 25.7% and 32.8%, respectively, from 6.2% and 7.1% in the two-year period. Of note, IIT does not budget to cover depreciation and any significant capital needs could cause greater year-to-year volatility in available funds ratios, to the extent the university cash funds related projects.

IIT's $250 million fundraising campaign is on target, according to management. The university has raised approximately $180 million of the goal, approximately two-thirds of which has been collected. A portion of campaign proceeds are expected to augment IIT's endowment, as well as fund certain capital projects.

MANAGEABLE DEBT BURDEN

IIT's direct debt burden remains manageable. MADS of approximately $16.2 million (fiscal 2024) consumes a moderate 6.1% of fiscal 2014 unrestricted operating revenues, down from 7.2% in fiscal 2010. Annual debt service and MADS coverage ratios softened in fiscal 2014 to 1.24x and 1.29x, respectively, from an average of more than 2x and 1.65x annually the prior three years. However, available funds ratios continued to improve, as noted.

IIT's research affiliate, IITRI, has a $10.4 million private placement with a local bank. The obligation is non-recourse to the university. However, the debt is reported in IIT's consolidated audit and included in Fitch's ratios.

A non-recourse student housing obligation is an additional consideration of Fitch's analysis, though not directly incorporated into IIT's debt ratios. Available funds ratios would fall to 29.1% from 32.8% of total long-term debt, including the obligation ($27 million).

IIT services the facility and commits to leasing unoccupied beds sufficient for the related entity to produce 1.0x debt service coverage. However, IIT has not had to lease any beds since fiscal 2007, which provides some comfort. In addition, related debt service coverage ratios are near 5x, per management. An LOC currently through March 31, 2016 secures the obligation.

IIT's lack of additional financing plans should help maintain a manageable debt burden. However, management is contemplating renovating two unoccupied buildings for future use, contingent upon undergraduate enrollment growth. The facilities could add 400-450 beds to the approximately 1,800 existing. The structure of any such obligation will influence how Fitch evaluates IIT's debt ratios in future rating reviews.

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

Applicable Criteria and Related Research:

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

--'Fitch Affirms Illinois Institute of Technology Rev Bonds at 'BB-'; Outlook Stable' (February 2014).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978854

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