Fitch Affirms New England Institute of Technology's Revs at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the long-term rating on $51.8 million of higher education facility revenue bonds issued by the Rhode Island Health and Educational Building Corporations on behalf of the New England Institute of Technology (NEIT or the institution).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by all available funds of NEIT and are further secured by a first mortgage lien.

KEY RATING DRIVERS

SOLID FINANCIAL OPERATIONS: The 'A+' rating primarily reflects NEIT's solid financial profile, evidenced by the consistent generation of positive GAAP-based operating surpluses driving strong debt service coverage and healthy levels of unencumbered resources relative to operating expenses and long-term debt. Offsetting factors include enrollment volatility, significant reliance on tuition and fee revenue, historically limited fundraising capabilities and a moderately high debt burden, with moderate exposure to variable rate debt and its related risks.

STABILIZING ENROLLMENT: NEIT's enrollment base is subject to economic cyclicality. Enrollment improved in fall 2013 reflecting signs of stabilization, after three consecutive years of a downward trajectory. NEIT is still feeling the impact of a struggling local economy and weak building industry which lessens demand for trade programs. Recent investments in medical industry programs provide some diversity to academic offerings.

DILIGENT MANAGEMENT TEAM: Strong operating results reflect management's conservative budgeting and prudent management of internal resources, after the completion of the new campus in 2011. The ability to generate consistent profitability in operations and maintain its policy of zero endowment reliance, notwithstanding the new facility and diligent attention to the downward economic cycles in previous years, is viewed favorably.

MANAGEABLE DEBT PROFILE: NEIT's debt burden is moderately high but manageable at 6% of fiscal 2013 operating revenues. Variable-rate debt accounts 25.7% of NEIT's outstanding bonds, which is hedged through an interest-rate swap. Fitch notes that NEIT's management has historically demonstrated prudence in managing the risks associated with its outstanding variable rate debt. Additional debt plans to finance a new student housing project on campus supports NEIT's strategy to grow enrollment while offering students a traditional campus experience. The projected debt, planned for early fiscal 2015, is expected to nearly double the current debt burden but is somewhat counterbalanced by historically high coverage levels and abundant resources.

RATING SENSITIVITIES

ENROLLMENT VOLATILITY: The institution's heavy reliance on student generated revenues makes its rating susceptible to significant shifts in enrollment.

FINANCIAL DETERIORATION: NEIT's rating is sensitive to its ability to maintain strong operations which fuel balance sheet growth. Failure to grow balance sheet resources to support increasing debt levels may yield negative rating pressure.

CREDIT PROFILE

NEIT was founded in 1940 to provide hands-on technical training at a reasonable cost. NEIT currently offers over 30 professionally and technically focused undergraduate and graduate programs. NEIT has its main campus in East Greenwich, Rhode Island, with two other locations in nearby Warwick. The recently completed East Greenwich campus features a fully renovated facility and houses all of the institution's administrative and student support services. NEIT's headcount enrollment for fall 2013 was 2,938 students.

NEW PROGRAMS OFFSET ENROLLMENT VOLATILITY

NEIT's headcount enrollment grew by 6.2% in fall 2013, after three consecutive years of declining enrollment. The growth in fall 2013 was largely driven by NEIT's recent investment in new professional programs and completion of the new campus in East Greenwich. Management believes there is likely to be further enrollment traction after recently hiring a new director of admissions. After the several years of weak demand for traditional trade programs, largely related to sluggish housing market and building industry recovery, NEIT's program expansion in both criminal justice and the medical industry, including nursing, physical therapy, occupational therapy, and veterinary technician programs, are contributing to the rebound.

The new East Greenwich campus, which is home to the aforementioned new programs, provides flexible capacity to accommodate enrollment growth and the technological requirements. NEIT regularly analyzes the labor market to assess job demand through intelligence from its career services office and technical advising committees, as well relying on labor statistics and traditional networking. According to management, trade programs that prepare students for employment as manufacturers, machine tool operators, welders and ship building technicians, among others, are in demand and provide opportunities for NEIT to grow. Fitch will continue to closely monitor NEIT's ability to stabilize enrollment given its cyclical nature and high level of tuition dependency. NEIT's ability to manage it enrollment budget is a key driver of the rating.

NEIT acquired the new campus for the purpose of expansion and creating a more traditional campus experience for students. Strategic initiatives to grow enrollment outside the immediate region are supported by NEIT's capital improvement plan which includes the construction of on-campus student housing. NEIT is expected to begin building the new residence facility in early fiscal 2015, with estimated completion for summer 2016 (fiscal 2017). This plan supports NEIT's strategic enrollment goals to increase headcount by 260 students in fall 2016. The on-campus housing project, which includes expansion of the dining facility and health facilities, is expected to be entirely debt funded.

STRONG OPERATIONS DRIVE RESOURCES

NEIT consistently generates double-digit operating margins; the fiscal 2013 margin was 15.9%. While Fitch considers this strongly positive, operations weakened slightly over the prior year's results (17.2%) due to the dip in enrollment in fall 2012 and the increased depreciation expense related to the new building financed with the series 2010 bonds. Operations through mid-year fiscal 2014 are well ahead of budget, primarily the result of increased enrollment in fall 2013 driving growth in student generated tuition and fees and auxiliary system revenues, coupled with strong expense management. Tuition and fee revenues increased 2.4% for the first six months of fiscal 2014, compared to the prior year period and 2% over the budgeted amount. Although expenses for the first six months are 4.1% higher than the prior year period, expenses are trailing 4% less than the budgeted amount.

Management expects to close fiscal 2014 with another strongly positive cash surplus. Fitch views these results as achievable given historically conservative management of resources and consistent profitability in operations, notwithstanding down cycles in previous years.

HEALTHY BALANCE SHEET

Historically strong operating performance has enabled NEIT to maintain its policy of zero endowment reliance and to build its healthy balance sheet cushion. Available funds, defined as cash and investments not permanently restricted, totaled $146.2 million as of June 30, 2013. Given NEIT's strong reliance on student generated revenues, this cushion provides an important buffer against unexpected declines in headcount. NEIT's operations are funded almost entirely by student generated revenues (98% of fiscal 2013 operating revenues).

Available funds relative to operating expenses ($53.9 million) and current long-term debt ($51.8 million) are very strong at 272% and 282.2%, respectively. While total pro-forma long-term debt is expected to increase to approximately $96.8 million after the issuance of $45 million of additional debt in early fiscal 2015, available funds to pro-forma long term debt is expected to remain sound at 151%. Fitch expects NEIT's strong operating performance will continue to drive growth in resources available to cover additional debt. The inability to do so could have negative rating implications.

Investment returns for NEIT have been modest, but positive, for the past two years. Lower returns relative to historical benchmarks are the result of NEIT's decision to reallocate a greater portion of its funds into lower yielding, more liquid asset classes. This decision was driven, in large part, by NEIT's experience during the financial market crisis when its portfolio lost nearly one-third of its total market value.

STRONG OPERATIONS SUPPORT DEBT BURDEN

NEIT's current long-term debt portfolio totals $51.8 million, with 25.7% of the capital structure hedged with an interest rate swap matching the maturity of the bonds. While Fitch is concerned with NEIT's high level of variable rate exposure and the related interest risks it presents, concern is somewhat mitigated by the institution's track record of managing the various risks associated with these instruments and the relative size of its resource base. Swap collateral counterparties are monitored closely, and NEIT has not had to post any collateral to date. Fitch expects that NEIT can comfortably manage the risks attendant to variable rate debt and related interest rate hedges.

Fitch calculated maximum annual debt service (MADS) of $3.8 million (occurring in 2022) comprises a moderately high 6.0% of 2013 operating revenues, which is counterbalanced by NEIT's consistently strong operating performance driving high MADS coverage of 4.7 times in fiscal 2013. NEIT's operating margins and MADS coverage levels are significantly higher than expectations for 'A+' credits rated by Fitch.

Additional debt plans of approximately $45 million for an on-campus residential housing project and upgrade to dining facilities, as early as July 2014, are expected to nearly double NEIT's debt profile. This would potentially increase NEIT's outstanding debt to approximately $95 million, with the new debt expected to be issued as fixed-rate for a term of 30 years.

The projected aggregate debt service schedule presented to Fitch indicates that MADS could nearly double in 2022. Under this scenario, Fitch's calculated an increase in debt burden to a high 11.0% of fiscal 2013 unrestricted operating revenues. Favorably, this high debt burden continues to be supported by strong operations, with projected net income coverage of approximately 2.5 times. Fitch notes that the existing debt service structure is flexible allowing NEIT the ability to layer in additional debt in later years, given its descending nature. While Fitch expects the increase in debt burden to be significantly higher, it should remain manageable based on NEIT's historically strong operating performance and abundant resources. In the event additional resources from operations are unavailable to support the additional debt, downward rating pressure could occur.

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

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria' (May 10, 2013);

--'Fitch Affirms New England Institute of Technology's Revs at 'A+'; Outlook Stable' (April 5, 2012).

Applicable Criteria and Related Research:

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=824509

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Contacts

Fitch Ratings
Primary Analyst
Nancy Faingar Moore, +1-212-908-0725
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
James George, +1-212-908-0652
Director
or
Committee Chairperson
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Nancy Faingar Moore, +1-212-908-0725
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
James George, +1-212-908-0652
Director
or
Committee Chairperson
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com