NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AAA' rating on approximately $182 million of outstanding revenue bonds issued by the California Educational Facilities Authority (CEFA) on behalf of Pomona College (Pomona):
The Rating Outlook is Stable.
SECURITY
The bonds are an unsecured general obligation of the college, payable from all legally available funds.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The 'AAA' rating primarily reflects Pomona's significant level of balance sheet resources, evidenced by its strong liquidity relative to debt and operations, and robust fundraising capabilities offsetting a moderately high debt burden, high financial aid needs and significant reliance on investment income/endowment spending.
STRONG DEMAND: The college benefits from a prestigious reputation for academic excellence which draws strong student demand, demonstrated by increasing applications, very selective admissions and a steady, solid matriculation rate.
POSITIVE OPERATIONS: Pomona generates consistently positive operating margins; however, operating performance is highly reliant on endowment spending and investment returns generated by its pooled investment fund.
MANAGEABLE FINANCIAL LEVERAGE: Pomona's moderately high debt burden and non-level debt maturities structure is offset by a track-record of generating sound debt service coverage from operations (inclusive of endowment spending) and the college's vast resources and prudent debt management.
RATING SENSITIVITY
PRESERVATION OF FINANCIAL RESOURCES: While unlikely, a material erosion in Pomona's strong financial cushion and/or material change in operating results, inclusive of endowment spending significantly driven by investment returns, could negatively impact the rating.
CREDIT PROFILE
Founded in 1887, Pomona is a small private, independent co-ed liberal arts college, located in Claremont, CA. Pomona is solely an undergraduate college, offering 45 undergraduate majors in natural sciences, humanities, social sciences and fine arts. The college is highly selective with a prestigious national reputation and strong student demand that continues to grow. Fall 2012 enrollment totaled 1,606 students.
HEALTHY FINANCIAL PROFILE
Pomona's impressive balance sheet liquidity and moderate financial leverage underpins its 'AAA' rating. As of June 30, 2012, available funds, defined by Fitch as cash and investments not permanently restricted, totaled $1.6 billion. Available funds covered fiscal 2012 operating expenses ($134.5 million) and outstanding debt ($192.1 million) by a very strong 12.0 times(x) and 8.4x, respectively.
Similar to many private colleges and universities with like-sized endowments, Pomona has significant exposure to alternative, illiquid asset classes. Excluding these investments, the college's adjusted available funds would still provide strong coverage of both operations and debt. Moreover, the market value of the college's pooled investment fund grew to approximately $1.87 billion as of Feb. 28, 2013 (unaudited).
INVESTMENT INCOME DRIVES OPERATIONS
Pomona continues to be heavily reliant on investment returns generated by its pooled investment fund to support operations. Investment income and endowment income appropriated for operations represents the college's largest revenue source, averaging over half of total operating revenues over the past five fiscal years. Student-generated revenues comprise the second largest revenue source and average just over one third of revenues.
Inclusive of endowment spending, Pomona's operating results have been consistently positive averaging 6.4% for the last five years (2008-2012). The endowment distribution for fiscal 2012 increased 1% to $65 million, resulting in a $4.6 million operating surplus (or 3.3% operating margin), compared to $10.7 million (or 7.7%) in fiscal 2011. Pomona estimates a fiscal 2013 operating surplus of more than $2.3 million and reflects a higher endowment distribution of approximately $66.1 million. The college's fiscal 2014 operating budget assumes a modest increase in endowment spending with a draw of $68.8 million.
STRONG DEMAND
Total headcount enrollment in fall 2012 totaled 1,606, or 1.3% above the prior year and 4.8% above fall 2008 levels. Per Fitch's rating methodology, stable-to-growing enrollment trends are viewed favorably. Pomona's selectivity is extremely high, demonstrated by a fall 2012 acceptance rate of 13%. The matriculation rate remained steady, averaging a solid 40% over the past five fall enrollment cycles.
To date, the college has received approximately 7,153 freshmen applications, admitted 923 students and received 360 deposits for fall 2013, in line with targeted projections. Pomona aims to grow freshmen matriculation to 410 in fall 2013, keeping with its target of 10 additional students per year and goal to maintain its small undergraduate class size at approximately 1,600 students. Fitch considers the goal to be reasonable and achievable, given enrollment trends and favorably trending year-to-date admissions statistics for fall 2013.
MANAGEABLE DEBT BURDEN
Pomona maintains an entirely fixed-rate debt portfolio, a credit factor viewed favorably by Fitch. Pro forma maximum annual debt service (MADS) totaled approximately $9 million (excluding bullet payments) in fiscal 2013 and consumed a moderately high though manageable 6.5% of fiscal 2012 operating revenues. Pomona continues to offset its moderately high MADS burden with solid debt service coverage. Fiscal 2012 income available for debt service of $25.6 million (inclusive of endowment spending) provided 2.8x MADS coverage. After 2013, Pomona's MADS decreases to approximately $7.6 million (excluding bullet payments) in fiscal 2016, consuming a more moderate 5.5% MADS burden, and stronger MADS coverage, increasing to a 3.3x.
Including the several bullet payments, Pomona's debt burden based on average annual debt service (AADS) ($8.84 million) does significantly change. AADS burden is still moderately high at 6.4% and AADS coverage is still strong at 2.9x. Fitch does not view the bullet maturities as material given Pomona's strong market access and ability to refinance the debt as needed.
Major capital plans over the near term include $91 million for two committed projects, the majority of which will be funded with cash on hand and donor funding, with the remaining (approximately $26 million) either debt funded or funded from a withdrawal of unrestricted endowment funds. Longer-term capital needs totaling $72 million for an athletic center and museum project are anticipated to be fully funded by gifts and internal reserves, although some level of debt may be considered. Pomona's potential future debt plans include a restructuring for existing debt to smooth out very large bullet maturities coming due in fiscal 2018 and 2019. Increasing debt burden is mitigated by Pomona's vast resources base, prudent debt management and strong market access to refinance debt maturities.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria' (June 12, 2012);
--'U.S. College and University Rating Criteria' (May 10, 2013);
--'Fitch Rates Pomona College's (California) Series 2011 Revs 'AAA'; Outlook Stable', dated June 2, 2011.
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791451
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