Fitch Affirms Midland Lutheran College, NE's Revs at 'B'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms $18.04 million of education facility revenue bonds issued by the Nebraska Educational Finance Authority on behalf of Midland Lutheran College, now known as Midland University (MU or the university), at 'B'.

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of the college, additionally secured by a cash funded debt service reserve.

KEY RATING DRIVERS

Weak Operations - Sustained negative financial performance over the past five years has depleted balance sheet resources; little improvement in operating margin is expected over the near term.

High Leverage - Outstanding debt continues to pressure MU's already weak financial cushion, with related debt carrying charges creating a substantial burden on annual operating revenues.

Recent Enrollment Gains - Increased student applications for fall 2011 reflect the absence of nearby competitor Dana College (Dana) which closed in summer 2010, and MU's addition of marketing and recruitment resources.

WHAT COULD TRIGGER A RATING ACTION

Deterioration in Resources: Any decline in balance sheet resources could put downward pressure on the rating.

Growth in Core Revenues: An inability to sustain upward trend in enrollment and related growth in student revenues will compromise the university's ability to bring operations gradually into balance.

CREDIT PROFILE

Fundamentally Weak Operations

The 'B' rating for MU reflects severely weakened liquidity as a result of deeply negative operating performance over the past five fiscal years. To manage these losses, MU drew upon its available funds, or cash and investments not permanently restricted. As a result of these draws MU's available funds totaled -$693 thousand, as of fiscal 2010, representing

-4.1% of operating expenses and -3% of outstanding long-term debt. The absence of material financial cushion makes MU extremely vulnerable to unexpected operating events.

MU anticipates negative margins for fiscal 2011; however, management expects results to improve slightly from the deeply negative performance recorded in fiscal 2010. Growth in student revenues due to the influx of Dana's former students and staffing initiatives, including an early retirement program are the primary factors cited to improve operating results. While MU's full year 2011 audit is not yet available, Fitch plans to review MU's credit upon receipt of the audited fiscal 2011 financial statements, expected in December 2011. Further balance sheet stress caused by deterioration of the modest improvement in operating performance could yield negative rating action.

Closing of Dana College

MU incurred expenses to successfully transfer approximately 320 former Dana students last year, honoring existing financial assistance arrangements and providing housing for its students. Concurrently, the university invested in new athletic programs, including bowling, lacrosse and wrestling. MU believes such investment was necessary to incentivize Dana transfers, who participated in such athletic programs, to persist at the university after their first year. Of the 320 Dana students that transferred to MU during fall 2010, over two thirds persisted for the second year, consistent with the university's typical annual retention rate.

Enrollment Improvement May Yield Results Over Time

Though headcount for fall 2011 declined slightly, a significant increase in student applications and a fairly stable matriculation rate (35%) resulted in the university enrolling its largest freshmen class in five years. An upward trend in enrollment and related revenues are critical to sustained improvement in MU's financial profile; particularly given its heavy reliance on student generated funding sources (73% of fiscal 2010 operating revenues). MU invested in marketing and recruitment resources and continues to implement annual tuition and fee increases (3%-5%) to further solidify recent financial improvements.

Through the combination of aforementioned efforts, MU expects to narrow losses over the next two fiscal years and achieve budgetary balance, on a GAAP basis in fiscal 2014. In Fitch's view, this may prove challenging in the absence of sustained improvement in student demand for the university.

High Debt Burden Coupled With Weak Balance Sheet Resources

MU's debt burden remains high at approximately 15%. While MU does not intend to issue any new debt, the university does periodically secure small loans from local lenders to support operations. Reflecting the severe financial stress facing the university in fiscal 2011, MU borrowed $2.5 million from its permanently restricted endowment pool ($11.6 million as of May 2011) which it plans on paying back starting in fiscal 2014 from any available sources of revenue. Management plans to work with donors to re-classify the remaining permanently restricted endowment funds to unrestricted resources in order to re-build MU's available funds. While these funds could modestly improve overall financial flexibility, the university's resource base will remain extremely thin through the intermediate term.

New Management and Smaller Board

Several changes in management occurred at MU over the past three years designed to bolster educational quality, improve student experience, and enhance fundraising capabilities. During fiscal 2010, the board of trustees (the board) installed a new president, while a new vice president for student development, a new vice president for admissions and enrollment management and a new chief academic officer took office in fiscal 2011. The size of MU's board also decreased by four members as seats vacated by several directors following expiration of their terms of service were not filled. MU believes a smaller board will better enable the university to focus on achieving near-term financial and operational improvements.

Midland Lutheran College, which was rebranded Midland University in 2010, is a private, co-educational liberal arts college located in Fremont, Nebraska, approximately 35 miles northwest of Omaha. The college primarily serves undergraduate students, but added masters programs in education and professional accounting in fall 2009. Midland is affiliated with the Evangelical Lutheran Church in America.

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

Applicable Criteria and Related Research:

--'Fitch Downgrades Midland Lutheran College, NE's Revs to 'B'; Outlook Stable' (March 31, 2011);

--'U.S. College and University Rating Criteria' (July 14, 2011);

--'Revenue-Supported Rating Criteria' (June 20, 2011).

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=640830

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

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