Jan 18 - Fitch Ratings has assigned a 'BBB' rating to $22 million of private college facility (PCF) revenue bonds, series 2012, issued by the Iowa Higher Education Loan Authority (IHELA) on behalf of Upper Iowa University (UIU, or the university). The series 2012 bond proceeds will fund the construction and equipping of two new residence halls, various infrastructure improvements, costs of issuance, capitalized interest and a debt service reserve. In addition, Fitch affirms the rating on $43.985 million outstanding IHELA PCF revenue bonds at 'BBB'. The Rating Outlook is revised to Negative from Stable. SECURITY The bonds are a general obligation of the university, payable from all legally available resources. KEY RATING DRIVERS AGGRESSIVE PROJECTIONS UNDERPIN REBOUND: The Negative Outlook reflects Fitch's view that the projections to return UIU's financial performance to the historically positive levels that underpin the 'BBB' rating are aggressive. Fitch notes that a combination of careful expense management and increases in both enrollment and tuition rates are required to meet the necessary benchmarks, and failure in any of these areas could compromise near-term recovery. OPERATIONAL FLEXIBILITY COMPROMISED: The trend of operating surpluses was discontinued in fiscal 2012 as the university produced a 3.7% deficit. Though improvement is expected, UIU's cash-basis budgeting will likely result in modestly negative operating results through fiscal 2014. DEBT AFFORDABILITY LINKED TO IMPROVEMENT: Fitch has historically considered UIU's moderately high debt burden manageable given the cash flow available to service annual obligations. Improvements in fiscal 2013, as compared to fiscal 2012, are required to maintain adequate cash flow coverage to support this key credit characteristic. STABILIZING ENROLLMENT: After some enrollment volatility during the 2011-12 academic year contributed to below-budget revenue generation in fiscal 2012, UIU's enrollment levels have rebounded in fall 2012, providing support for the somewhat improved financial results expected in fiscal 2013. WHAT COULD TRIGGER A RATING ACTION INABILITY TO ACHIEVE PROJECTIONS: Failure on the part of UIU to achieve projected incremental financial operating improvements in each of the next four fiscal years, culminating in solidly positive margin by fiscal 2016, will likely trigger negative rating action. ADDITIONAL DEBT ISSUANCE: The issuance of additional revenue bonds prior to the stabilization of financial operating performance and without a corresponding increase in resources available for repayment could result in negative rating action. CREDIT PROFILE The Negative Outlook indicates recently weakened financial performance in fiscal 2012 and the aggressive nature of the projections that underpin recovery in the near term. In fiscal 2012, a combination of factors resulted in an operating deficit of 3.7% as compared to an average surplus of 5.8% in the prior five fiscal years (2007 - 2011). The primary issues included weakened non-traditional enrollment as the university transitioned to a new, more centralized enrollment process, booking certain accrual-based liabilities and increasing depreciation expense. Some of the issues that drove the deficit have been addressed for fiscal 2013, including enrollment growth consistent with budgeted expectations and incorporating the expense methodology implemented in fiscal 2012; however, the university is still projecting a modest GAAP-basis deficit. The lack of financial flexibility that will characterize UIU during the multi-year recovery period creates a significant credit concern, particularly given the university's limited balance sheet cushion and somewhat high debt burden. Fitch considers the Negative Outlook as appropriate to encapsulate real potential for negative rating action should the university fail to achieve incremental annual improvement in the immediate term. UIU provided Fitch with projections which contemplate a return to solidly positive operating results by fiscal 2016. The recovery requires solid increases in student-generated revenues and stringent expense management practices. The growth in student generated revenues is predicated on growing enrollment by 3% per year and escalating tuition by approximately 3% annually. Expense growth must be monitored diligently given that annual operating expenses have grown by an average of 13.5% in each of the last five fiscal years. Further, depreciation expense will increase in fiscal 2014 and 2015 as the university's debt-financed capital projects are brought online. Fitch views these assumptions as aggressive, and notes that shortfalls in any of these areas could result in negative rating action. UIU was founded in 1857 in Fayette, Iowa. The university offers both undergraduate and graduate level programming at its residential Fayette campus, 20 educational extension centers in the Midwest, three international campuses, and a distance education center. UIU's use of multiple education delivery modalities is viewed favorably, as demand for the different modalities is not correlated. With six distinct starting points during each academic year, students take two full-credit courses over eight-week terms, providing flexibility to meet degree requirements.