CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms its 'AA-' rating on the following Board of Governors of Marshall University (MU) revenue bonds:
--$51.9 million university revenue bonds, series 2011;
--$34.8 million university refunding revenue bonds, series 2010.
The Rating Outlook is Stable.
The bonds are on parity, and are secured by a pledge of special revenues, consisting primarily of net auxiliary revenue from the university's housing, dining and parking facilities, combined with a portion of educational and general capital fees, various rental income, athletic facility fees and legally available funds. The legally available funds portion of the pledge is principally auxiliary system reserves held by the state treasurer.
KEY RATING DRIVERS
Stable Enrollment Supports Pledged Coverage: The 'AA-' rating reflects historically stable student enrollment and demand for auxiliary facilities. Pledged auxiliary revenues in fiscal 2012 provided approximately 2.0x maximum annual debt service (MADS) coverage, and 2.5x including legally available funds. Estimated fiscal 2013 and budgeted fiscal 2014 coverage is expected to be similar.
Solid University Operating Profile: The pledged revenues are supported by Marshall University's solid institutional profile, with relatively stable enrollment over time, historically positive operating results, a selective demand profile and liquidity ratios consistent with the rating category.
Continued State Operating Support: The university benefits from state of West Virginia ('AA+'; Stable Outlook) operating appropriations. Fiscal 2013 appropriations comprised about 28% of operating revenues, contributing to what Fitch considers good revenue diversity. However, that proportion may decline in future years given cuts of 7.5% in fiscal 2014 and another possible cut in fiscal 2015. These reductions follow several years of modest increases, and come at a time when Fitch observes many other states stabilizing or increasing public university support.
STABLE DEBT SERVICE COVERAGE: A significant weakening in pledged debt service coverage could result in negative rating pressure. The rating assumes that net auxiliary revenues cover debt service, as well as the enhanced legally available funds. Relatively stable enrollment over time supports pledged bond revenues.
POSITIVE OVERALL UNIVERSITY OPERATIONS: Fitch's rating and outlook assume that overall university operating performance will continue to be positive on a full accrual basis. Fitch expects Marshall to manage effectively through any cuts in state operating appropriations.
Marshall University is the 2nd largest public university in West Virginia. Its primary campus is located in Huntington, part of a metropolitan area on the state's western border adjacent to both Ohio and Kentucky. Preliminary headcount enrollment for fall 2013 is in excess of 12,737 students (over 10,933 FTE), of which 75% are undergraduates. Marshall has several professional programs, including a college of medicine, and new pharmacy and physical therapy programs. About 75% of students come from West Virginia.
Stabilized Auxiliary Operations and Coverage
Pledged revenues are primarily auxiliary facility revenues (about 75%) generated from Marshall's housing, dining and parking enterprises. The remaining pledged revenues are education and general capital fees (net of debt service on MU's proportion of state bonds); medical center rental income; a specified amount of athletic facility enhancement fee revenues (currently $500,000 per year); and other legally available funds. Legally available funds is a defined term, and is essentially enterprise system fund balances held by the state treasurer. Fitch understands that these balances may be periodically spent on auxiliary renewal and replacement projects. This enhanced security structure became effective with the series 2011 bond issuance, and retroactively applies to the series 2010 revenue bonds.
Debt service coverage from pledged revenues (excluding legally available funds) was 2.0x in fiscal 2012, and the university estimates coverage at 1.6x for the fiscal year ending June 30, 2013. Budgeted fiscal 2014 coverage is similar. These coverage levels are significantly stronger than those generated from prior year auxiliary net revenues (before additional fees and income were added to the security pledge with the fiscal 2011 bonds). When other legally available funds are included, the coverage calculation increases to nearly 2.5x in fiscal 2012, an estimated 2.8x in fiscal 2013, and a similar level budgeted for fiscal 2014. Fitch considers these levels solid.
General University Operations
Positive Operating Performance
Because the strength of MU's auxiliary system is directly linked to overall university demand and financial operations, Fitch also assesses the university's general credit characteristics. The financial operating profile is characterized by cyclical but typically positive operating margins on a full accrual basis and a fairly diverse revenue base. Major fiscal 2012 operating revenues included net student fees and auxiliary revenues (36%), state operating appropriations (27%), and various grants and contracts (much of which are Pell grants and other state and federal scholarship funds). State appropriations increased modestly in recent years, including fiscal 2013, but were cut about 7.5% in the current 2014 budget. Management expects another cut in fiscal 2015. Operating results (before capital) were $2.6 million in fiscal 2012 (an operating margin of 1%). Management projects GAAP operating results to be stronger in fiscal 2013.
Balance Sheet Consistent With The Rating Category
Marshall's balance sheet is consistent with peer public institutions in the 'AA' rating category, in Fitch's view. Fiscal 2012 available funds (after deducting series 2011 bond proceeds) was about $113 million, equal to 42% of operating expenses and 103% of outstanding debt. Fitch defines available funds as cash and investments less certain restricted net assets.
Outstanding debt at June 30, 2013 was $109 million, including the series 2011 and 2010 revenue bonds, capital leases and debt obligations to the State Higher Education Commission. MADS debt service of about $9.1 million resulted in a moderately low 3.4% debt burden, and sound institutional coverage of about 2.2x. The university's debt is all fixed rate with a conservative declining debt service structure. The university reports no new debt plans at this time.
Excluded from the university's $109 million debt amount is about $89 million of non-recourse, privatized housing bonds (Marshall Properties L.L.C.), which are variable-rate demand bonds swapped to fixed-rate. A portion of gross project revenues (over 50% in fiscal 2012) comes from mandatory student fees, as the project includes a three-story wellness and recreation center. Fitch believes that this privatized housing and recreation center project has strong connectivity to the university, but because the project security is non-recourse, the related project debt is not included in Marshall's debt and leverage ratio calculations.
Relatively Stable Long-term Enrollment
Preliminary fall 2013 headcount enrollment was in excess of 12,737 (10,933 FTE), down about 3.0% on an FTE basis from fall 2012, mainly due to part-time graduate enrollment. This decline follows very modest dips in the prior two years, but Fitch views overall enrollment as somewhat cyclical, and not inconsistent with historical levels. Undergraduate demand remains solid in terms of freshman application growth, relatively selective freshman admissions (56% in fall 2013) for a regional public university, and solid freshman matriculations rates (44% in fall 2013, indicative of a regional demand niche). School of medicine (SOM) enrollment (typically 290 students) has remained stable and highly selective, even as SOM works its way out of a 2-year probation imposed in 2011 by the specialized accrediting body, LCME. University management reports that a new SOM dean is in place, diversity, student support and other procedural changes have been implemented, and a determination of the probation status is expected this month. Fitch understands that a medical school on probation remains accredited, with all attendant rights and privileges.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria', dated May, 2013;
--'Fitch Rates Board of Governors of Marshall University Revs 'AA-'; Outlook Stable' dated Oct. 24, 2011.
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria