Fitch Ratings affirms the long-term 'BBB-' rating on approximately $62.28 million of outstanding Health, Educational and Housing Facility Board of the City of Chattanooga revenue refunding bonds, senior series 2005A issued on behalf of the CDFI Phase I, LLC (the project). At the same time, Fitch affirms the 'BB+' rating on approximately $19.89 million of outstanding subordinate series 2005B bonds.

The Rating Outlook is changed to Positive.

SECURITY

The senior and subordinate series bonds are a general obligation of the project, secured by and payable from the revenues of CDFI's phase I, II and III housing facilities. The subordinate series 2005B bonds are additionally secured by designated payments made by the University of Chattanooga Foundation (the foundation) through fiscal 2013.

RATING DRIVERS

SELF-SUSTAINING PROJECT: The project is currently fully self-supporting as a result of continued strength in occupancy and prudent management of facility expenses by University of Tennessee at Chattanooga's (UTC). The project's improved operating performance offsets the sunsetting of the foundation support that secures the subordinate bonds thru fiscal 2013. In fiscal 2012, the senior and subordinate debt achieved debt service coverage levels of 1.73x and 1.28x, respectively, excluding foundation support.

GENERAL CREDIT CHARACTERISTICS: The ratings reflect the standalone nature of the project, largely mitigated by the project's essential role in (UTC) residential life program; and steady enrollment growth which has improved demand for UTC campus housing.

CONSTRAINED FLEXIBILITY: Counterbalancing rating factors include dependence on student rental payments as the project's primary revenue source and the somewhat limited pricing flexibility given the project's high rates relative to other on campus housing alternatives.

INTEGRATION WITH UTC: The project is managed as part of UTC's 3,009 bed housing system (the system) and represented approximately 57% of available beds in fiscal 2012.

SENSITIVITY

IMPROVED OPERATING PERFORMANCE: The ability of the project to sustain improved operating margin in the absence of foundation support could have a positive rating impact.

CREDIT PROFILE

CDFI Phase I, LLC is a subsidiary of Campus Development Foundation Inc., which was formed by the foundation to acquire real estate and to construct, manage, and operate housing for UTC students. CDFI constructed the 1,726 bed project in three phases, with the final phase opening in 2004.

The project is non-recourse to the university and the foundation. However, UTC manages the project as part of its housing system and sets project room rental rates. In Fitch's view, management of the system and the project as a collective whole ensures the project plays an integral role in residential life on UTC's campus and that rates and charges are set competitively. Given its robust amenity package, UTC has historically priced project beds at a premium relative to other options within the system. The University of Tennessee System implemented a below-market rent increase of 3.5% in fall 2012, which will continue in both fall 2013 and 2014. This is lower than the 5% increase in fall 2011, which management deems necessary to maintain the system's competitive standing.

Overall occupancy of the system, including the project, was 98.2% for fall 2012 or fiscal 2013, with project occupancy alone equaling a very strong 100% for fall 2012. Strength in overall housing demand was consistent with the prior fiscal year and necessitated management housing approximately 200 students in a hotel for the fall 2012 semester. As is typical, this figure drops in the spring semester (36 students for spring 2013). Due to demand for housing, UTC brought an old dormitory back on line during fiscal 2013 that added 167 beds to the system, 25 of which were added to the project.

The project's operating margin on a GAAP basis was effectively breakeven in fiscal 2012, at approximately 0.1%, significantly better than the five-year average of negative 11%. Operating performance of the project continues to improve due to UTC's continued ability to improve collections, lower management fee and better cost controls. Management anticipates generating an operating surplus again in fiscal 2013. Maintenance of positive operating results without the need for foundation support, which ends this current fiscal year, may yield positive rating pressure.

Revenue diversity is limited as is typically the case with housing projects. Approximately 93% of revenues were derived from rental income in fiscal 2012 as in the previous year. This reliance on a single revenue stream highlights the importance of maintaining strong project occupancy, but is mitigated by the project's strong demand and 100% occupancy.

The project generates adequate debt service coverage despite this revenue concentration. Net revenues available for debt service reached $8.15 million in fiscal 2012, up 8.3% from the prior year. In fiscal 2012, coverage of the senior debt reached 1.8x, while the subordinate debt achieved coverage of 1.34x. These coverage levels are notably higher to the prior year and include the funding subsidy provided by the foundation for the subordinate bonds.

A security fund was established by the foundation under the bond documents which the project is required annually draw upon. The project will continue to receive the subsidized payments from the security fund through fiscal 2013. Since fiscal 2010, the draw has not been required by CDFI to meet the required debt service coverage ratio on the subordinate bonds and is ultimately returned to CDFI with year-end surplus funds. As of June 30, 2012, the trustee held surplus funds of about $134,064 for this purpose. The foundation had also previously provided supplemental support to the overall project, though these contributions have not been necessary since fiscal 2009.

Due to continued strong demand for housing at UTC, its campus master plan includes the potential construction of additional housing in fiscal 2016-2017. Fitch expect UTC's housing demand will continue to sustain solid project occupancy levels and generate net revenues necessary to support associated debt service if and when additional beds are added. Issuance of additional debt on parity with the bonds is not currently anticipated.

UTC is a metropolitan university, located near downtown Chattanooga. For fall 2012, UTC's total enrollment was 11,660, reflecting a 2% increase over the prior year and 19% greater than the fall 2008 enrollment.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria' (June 12, 2012);

--'Fitch Affirms CDFI Phase I, LLC's (TN) Sr. Revs at 'BBB-' & Sub Revs at 'BB+', Outlook Stable' (Feb. 22, 2012).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

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