NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'BBB' rating on approximately $17.5 million North Carolina Capital Facilities Finance Agency revenue bonds, series 2012 issued on behalf of Methodist University (MU, or the University).
The Rating Outlook is Stable.
The bonds are a general obligation of the university. Further securing the bonds are a fully funded DSRF and a mortgage on the core campus.
KEY RATING DRIVERS
STABLE OPERATIONS SUPPORT AFFIRMATION: The 'BBB' rating reflects historically stable operating performance and adequate coverage of pro-forma debt service obligations. Counterbalancing factors include limited revenue diversity, adequate balance sheet resources and variable rate debt exposure.
ENROLLMENT FLUCTUATION: MU's fall 2012 incoming class count was lower than planned; however, a combination of a tempered tuition rate increase and additional financial aid is expected to improve fall 2013 enrollment.
LIMITED REVENUE DIVERSITY AND LIQUIDITY: The university derives over 85% of its revenue from student tuition and fees, which while typical of like rated private institutions, necessitates prudent management of MU's limited balance sheet resources.
VARIABLE RATE EXPOSURE: MU's floating rate debt is high at 55% of the portfolio and half of the variable debt is unhedged. The rating level denotes MU's limited ability to manage the potential risks presented by its variable rate exposure.
ENROLLMENT STABILITY AND GROWTH: The university's ability to grow and maintain enrollment is key to operational sustainability and an extended decline in enrollment could pressure the rating.
ADDITIONAL DEBT ISSUANCE: While not expected over the near term, MU's incurrence of any new debt without a commensurate increase in resources could negatively affect the rating.
Methodist University, located in Fayetteville, NC was founded as Methodist College in 1956, initiated operations in 1960 and graduated its first class in 1964. MU serves approximately 2,400 students who originate from 41 states and 53 countries. The university serves a diverse set of traditional residential students, commuters, soldiers from a nearby military base, Fort Bragg (the base) as well as evening and part-time students.
REVENUE CONCENTRATION PARTIALLY OFFSET BY CONSISTENT MARGINS
Typical of regional private universities, MU relies primarily on tuition, fees, and auxiliary revenue for its operations. Of total revenues, 86% are generated from student tuition and fees; this reliance requires the university to closely manage its enrollment, since slight declines can adversely affect the financial performance of the university.
MU's six month operational results (as of December 2012) indicate a weaker margin for fye 2013, driven primarily by enrollment decline. Fitch still expects MU to generate at least a breakeven margin for fiscal 2013 based on conservative management practices which include setting aside contingency funds on an annual basis.
The university has a history of generating positive operating margins, averaging 5.3% for five years ending 2012. Fiscal 2012 operations generated a 6.8% margin; lower than the 7.6% margin generated in fiscal 2011 due to an increase in institutional support and related expenses. Net tuition and fees grew 9.3% on average over a five-year period denoting stability and consistency over time. The consistency of MU's margins is a result of management's conservative and diligent financial practices.
ENROLLMENT CHALLENGES ARE BEING ADDRESSED
Given MU's tuition dependence, Fitch considers demand a critical factor in the rating process. Enrollment grew 17% from fall 2007 to fall 2011, declined in fall 2012. MU's fall 2012 enrollment headcount of 2,359 was 5% lower than the previous year (2,476). To help bolster enrollment, MU limited its tuition increase to less than 3.5% for fall 2013, increased funds set aside for financial assistance and for contingencies relating to operations. As a result of these measures, deposits for fall 2013 enrollment are above the same time last year.
MODEST LIQUIDITY LEVELS
Available funds defined as cash and investments, less any restricted funds, totaled $16.4 million, slightly lower than fiscal 2011's $16.5 million and comprised 35.7% of operating expenses and 41.8% of pro forma debt. These metrics are slightly weaker than similarly rated peers. The university's endowment totals $19.9 million and is invested with three separate portfolio managers. MU's investment committee, comprised of BOT members, meets quarterly to review endowment performance. The investment asset allocation is conservative, with 62% in equities, 34% in bonds, and the remainder in cash. The investment return for year to date fiscal 2013 was 16.1% and 5.35% for the last quarter ended March 31, 2013.
DEBT PROFILE AGGRESSIVE FOR RATING LEVEL
Existing debt, outstanding in the approximate amount of $39 million, consists of 2012 fixed rate bonds ($17.5 million), series 2005 variable rate demand bonds ($19.4 million) supported by a Wells Fargo Bank letter of credit and a series of bank secured notes totaling approximately $2.1 million. MU has swapped 50% of the series 2005 variable-rate debt to fixed rate and these swaps expire March 2020. The cumulative negative values of the swaps are $2 million currently. The unhedged portion of variable-rate debt (50%) accounts for 29% of the total debt portfolio and is viewed as aggressive for the rating level. Slightly more than half of MU's debt is in variable-rate mode, though MU expects to fix out more of its variable-rate exposure in the future which Fitch views favorably.
MU's maximum annual debt service (MADS) accounts for a moderate 6.1% of unrestricted operating revenue and compares favorably to BBB rated medians. Additionally, the university generates 2.3x coverage of proforma MADS from net available income which exceeds median coverage levels for colleges and universities similarly rated.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2013);
--'College and University Rating Criteria' (May 2013);
--'Methodist University, North Carolina' (Aug. 3, 2012).
Applicable Criteria and Related Research:
Methodist University, North Carolina
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria