Fitch Rates Baylor University Series 2002B SAVRS 'AA-'

Business Wire, Feb 28, 2008

NEW YORK -- Fitch assigns a rating of 'AA-' to approximately $45.58 million of Waco Education Finance Corporation select auction variable rate securities (the bonds) series 2002B issued on behalf of Baylor University (Baylor). The bonds, which are an unsecured general obligation of Baylor, sold via negotiation in May 2002 to fund various capital projects. The Rating Outlook is Stable.

The 'AA-' reflects Baylor's sustained track record of healthy operating performance and liquidity; strong student demand and competitive academic profile; and an experienced management team which possesses a solid planning and financial/investment management background. Offsetting credit factors include Baylor's fairly dormant fundraising activity over the past five fiscal years, though recent organizational changes are addressing this concern; a moderately high reliance on student generated sources to fund the operating budget; and an increasing, though still manageable, debt burden which may be further pressured if planned capital projects are not offset by expected philanthropic support.

In each of the past five fiscal years, Baylor's unrestricted operating revenues have outpaced unrestricted operating expenses yielding sizeable surpluses. For fiscal 2007, Baylor's operating margin was approximately 9.0%, comparing favorably to fiscal 2006 (6.9%) and the fiscal 2002 through fiscal 2005 period when the margin ranged between 2% and 3%. Much of this improvement is attributable to strategic increases in student tuition and fees; increases in auxiliary revenues stemming from growth in the number of residential students; and higher investment returns reflecting a balanced asset allocation strategy and prudent endowment spending policy (5%). If the impact of gains and losses from endowment spending were excluded from unrestricted revenues, Baylor's fiscal 2007 operating margin would have still have been positive (1.3%). This is somewhat uncommon for an 'AA' category institution as credits at this rating level generally hold fewer interest and dividend paying securities and thus need to annually spend a portion of investment fund appreciation. In Baylor's case, income generated from its oil and gas holdings are now included in investment income which helps to bolster performance.

With approximately 72% of unrestricted revenues coming from student generated sources, Baylor's operating performance is dependent upon enrollment. Over the past five years, Baylor's total headcount has remained at approximately 14,000 students, the majority of which are undergraduates (91%). Applications over this period increased at a significant average annual rate of 31%, from 8,968 in fall 2003 to 26,514 in fall 2007, while acceptance rates declined sharply and matriculation percentages improved. Management's efforts to strengthen Baylor's academic reputation; expand and renovate campus facilities; and enhance the student experience, while at the same time maintaining its Christian roots has developed into a unique competitive advantage. Despite increases in tuition increases averaging approximately 7.2% over the past five years, Baylor's student charges remain very competitive as compared to selective private universities. Importantly, Baylor's pricing flexibility is somewhat constrained by the predominance of nearby state public universities, including the University of Texas System (revenue financing system bonds rated 'AAA' by Fitch) and the Texas A&M System (revenue financing system bonds rated 'AA '), which are strong competitors.

Baylor's available funds, defined as cash and investments which are not restricted, have increased significantly over the past five years, from $331 million in fiscal 2003 to $642 million in fiscal 2007. For fiscal 2007, available funds represented a sound 187.1% of operating expenses ($343.3 million) and 221% of outstanding debt. Under a more conservative view of liquidity, which includes only those investments which could be liquidated within 120 days without a significant loss in value, available funds would decline only slightly, to $610 million. Management's practice of monitoring portfolio liquidity and potential calls on these resources was viewed favorably in the rating process. The market value of Baylor's endowment totaled $1.1 billion as of Nov. 30, 2007, an increase of approximately 4% from May 30, 2007. In the difficult fourth quarter of 2007, the market value increased by 1.2%. Asset allocation is reflective of numerous institutional priorities including maximization of return; stable operating support; and preservation of principal over time. Alternative asset classes, including private equity, absolute return, and real assets, represent approximately 33% of total investments.

Through 2020, Baylor has identified approximately $465 million of additional capital needs, including academic facilities; student life/athletics; and strategic real estate purchases. Approximately $170 million of the expected capital spending through 2012 ($375 million) is expected to be debt financed, with increased fundraising and other revenues providing additional funding sources.