NEW YORK--()--Fitch Ratings assigns an 'A' rating to approximately $15 million of revenue bonds, series 2013 A, issued by the Dutchess County Local Development Corporation (LDC) on behalf of Marist College (Marist, or the college).
The fixed-rate series 2013 A bonds are expected to price via negotiated sale on or about March 14. Proceeds will be used to construct a new multi-purpose academic building, renovate the attached student center and to pay various costs of issuance.
At the same time, Fitch affirms various long-term ratings detailed at the end of this Ratings Action Commentary.
The Rating Outlook is Stable.
SECURITY
Revenue bonds are an unsecured, general obligation of the college, payable from all legally available funds.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: Marist's steady, positive operating results, solid balance sheet resources, and manageable debt burden underpin its 'A' rating. Counterbalancing factors include high revenue concentration, a highly competitive operating environment and exposure to variable-rate debt.
SOUND DEMAND: Total enrollment has generally been trending upwards in recent years, while selectivity continues to improve.
LIMITED REVENUE DIVERSITY: Typical of many private higher education institutions, Marist's dependency on student-generated revenues (90% of total unrestricted operating revenues in fiscal 2012) is extremely high. This degree of revenue concentration leaves the college more vulnerable to unexpected, unfavorable shifts in student demand.
CAPABLE MANAGEMENT: Marist's experienced management team demonstrates prudent financial and facilities planning, resulting in manageable future capital needs. Well-executed enrollment strategies continue to generate sound demand for the college's programs.
RATING SENSITIVITIES
ONGOING CAPITAL NEEDS: Ongoing capital investment will result in periodic debt issuance and spend-down in financial resources, although Marist's track record of healthy operating results and debt service coverage partially mitigates this concern.
VARIABLE-RATE DEBT EXPOSURE: Marist maintains a disproportionately high percentage of variable-rate debt, albeit exposure is declining, with various letters of credit and interest rate hedges exposing it to counter-party risk.
CREDIT PROFILE
Sound student demand trends continue to fuel Marist's strong operating performance. The college received a record number of freshman applications (11,466) for fall 2012. Marist's selectivity also improved notably over the past few years. The college's acceptance rate declined to a solid 31.4% for fall 2012 from 41.9% for fall 2007. Matriculation was consistent with prior years, remaining moderately low at 30.5%, indicative of the college's highly competitive operating environment.
The college's operating margin improved in fiscal 2012 to a solid 11.7%, consistent with prior years, after having narrowed slightly in fiscal 2011 to 9.3%. The decline resulted from the planned hiring of additional personnel and an increase in employee-related healthcare costs. Fitch views positively Marist's experienced management team's ability to carefully craft annual budgets that include moderate enrollment growth assumptions, conservative expense increases, and contingency reserves, resulting in annual surpluses.
Marist's strong operating performance is tempered by its extremely limited revenue diversity, with student-generated revenues, including tuition, fees and auxiliary receipts, providing 90% of the college's operating revenues. However, Fitch believes Marist's ability to annually achieve enrollment targets over the past several enrollment cycles partially mitigates this concern.
Solid balance sheet resources remain a credit strength of the college. Available funds, or cash and investments not permanently restricted, totaled $172.9 million in fiscal 2012, an increase of 21.5% since fiscal 2008. Available funds covered fiscal 2012 operating expenses ($140.6 million) and pro forma debt ($111.7 million) by a solid 123% and 154.9%, respectively. Fitch views favorably the college's solid financial cushion relative to both financial leverage and operating expenditures which is in line with expectations for the 'A' rating category.
Total pro forma debt of $111.7 million includes revenue bonds, notes payable and lease obligations. Pro forma maximum annual debt service (MADS)on revenue bonds is expected to occur in fiscal 2022 at about $7.65 million. MADS coverage based on fiscal 2012 net income available for debt service ($32.5 million) equals a sound 4.2x, with MADS representing a moderate, but manageable, 4.8% of unrestricted operating revenues. Marist's leverage ratios compare favorably to those of other private colleges and universities similarly rated by Fitch.
Marist's ongoing capital needs include its north campus redevelopment housing project which it expects to fund with both additional debt and internal resources. The 550-bed project would consist of both renovating existing facilities and new construction. Deferred maintenance will continue being funded by gifts and annual operating surpluses. Fitch is concerned that Marist's future capital plans could pressure financial resources; however, these concerns are partially offset by Marist's historical healthy operating margins and debt coverage levels. Additionally, Fitch recognizes that the project is essential if Marist is to continue to enhance student demand and grow student generated revenues.
Marist maintains an industry-standard endowment distribution policy of 5% of the endowment's 12-quarter average market value. However, given its steady operating surpluses, the college limits the use of this policy and does not depend on it for operating support, a factor viewed favorably by Fitch. Moreover, Marist maintains a fairly conservative investment policy. According to management, the college expects to fund a portion of its 5% allocation to private equity investments in fiscal 2013, but capped the single private equity investment at $9 million, which is below the 10% policy limit for any one manager and 15% limit for total alternative investments. Overall, Fitch views Marist's exposure to alternative, illiquid asset classes as minimal.
About 82.1% of Marist's current debt portfolio is in variable-rate mode. While variable-rate debt represents a disproportionately high share of outstanding debt, about 60% of the college's variable-rate demand bonds (VRDBs) are synthetically-fixed through an interest rate swap agreement. Additionally, all VRDBs are supported by five irrevocable direct-pay letters of credit (LOC). Marist is in the process of negotiating renewals on three of the LOCs. Following the current issuance, the college's debt portfolio is expected to be composed of a more moderate mix of 30% and 70% of fixed- and variable-rate debt, respectively, which Fitch views favorably. Fitch views the heavy portion of VRDBs as a concern but going forward bonds are expected to be issued in the fixed-rate mode. Additionally, the expectation that Marist will continue to produce healthy margins and maintain strong demand to support growing resources offsets this concern.
Founded by the Marist Brothers in 1929, Marist is a private four-year liberal arts college located on a 210-acre campus in Poughkeepsie, New York, with a branch campus in Florence, Italy, extension centers throughout New York, and educational offerings offered on-line and study-abroad programs. Fall 2012 headcount and full-time equivalent enrollment totaled 6,377 and 5,439, respectively.
Fitch affirms the following long-term ratings:
--$13.42 million of Dutchess County LDC revenue refunding bonds, series 2012A at 'A';
--$70.34 million Dutchess County Industrial Development Agency (IDA) variable-rate demand civic facility revenue bonds at 'A' (underlying).
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);
--'U.S. College and University Rating Criteria' (May 25, 2012);
--'Fitch Affirms Marist College's (New York) Series 2012A Rfdg Revs 'A'; Outlook Stable' (April 4, 2012).
Applicable Criteria and Related Research
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679152
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
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