NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the long-term 'AAA' rating on the following series of bonds issued by the New Hampshire Health and Education Facilities Authority on behalf of Dartmouth College (Dartmouth, or the college).
--$101 million variable-rate demand bonds, series 2002;
--$83.7 million variable-rate demand bonds, series 2003.
The series 2002 variable-rate demand bonds (VRDBs) are supported by a standby bond purchase agreement provided by JPMorgan Chase Bank, N.A. (rated 'F1' by Fitch). Fitch does not maintain a short-term rating on Dartmouth's series 2003 VRDBs.
The Rating Outlook is Stable.
Revenue bonds are an unsecured general obligation of the college.
KEY RATING DRIVERS
PREMIER REPUTATION: Dartmouth's prestigious reputation for academic excellence, demonstrated by strong student demand, highly selective admissions criteria, and modestly growing enrollment underpin its 'AAA' rating.
FINANCIAL FLEXIBILITY: A significant level of balance sheet resources; healthy fundraising ability; and a diverse revenue base, further support the rating and provide the college with a healthy financial cushion.
OPERATING MARGIN WEAKENS: Management's timely implementation of various budgetary initiatives following the financial crisis enabled Dartmouth to generate a positive operating margin in fiscal years 2010 - 2012, although the margin reverted to breakeven in fiscal 2013 due largely to expenditure growth.
HIGH, BUT MANAGEABLE DEBT BURDEN: Dartmouth's pro forma debt burden is elevated for the rating level, even when adjusting for bullet maturities. Estimated average annual debt service results in a moderately high debt burden, although coverage from net operating income remains sound at over 1.2x.
OPERATING PERFORMANCE: An inability to stabilize operations and restore a positive operating margin over the near-term, inclusive of endowment spending, could pressure the rating and or Outlook.
BALANCE SHEET PRESERVATION: While not expected, a material decline in financial resources could pressure operating performance given Dartmouth's slim operating margin and somewhat elevated leverage metrics.
Founded in 1769, Dartmouth is the ninth oldest college in the U.S. and one of the eight schools of the 'Ivy League'. Its campus is situated on 265 acres in Hanover, NH. It offers about 1,400 undergraduate courses, as well as several masters and doctoral programs through its prestigious graduate schools, primarily the Geisel School of Medicine, Tuck School of Business and Thayer School of Engineering.
Dartmouth's prestigious reputation is the basis for its strong demand characteristics. Fall 2013 freshmen acceptance rate was a selective 10.4%, with a solid 48% of accepted students choosing to enroll. Fall 2013 full-time equivalent enrollment totaled 6,185 undergraduate and graduate students, an increase of 5.8% since fall 2009. While student demand remains strong, freshmen applications to the college declined over the past two fall enrollment cycles (2013 - 2014).
The concern over the two-year decline in applications is largely offset by Dartmouth's growing enrollment and highly selective admissions, which provide it with significant flexibility. Management has also historically met its target freshmen class size of about 1,100 each year, a trend Fitch expects will continue. Fitch will continue to monitor application volume and assess what, if any, impact a potential prolonged decline, however unlikely, could have on Dartmouth's operations.
SIGNIFICANT RESOURCE BASE PROVIDES FLEXIBILITY
Dartmouth's significant level of balance sheet resources provides it a strong financial cushion. Available funds, or cash and investments not permanently restricted, totaled $3.91 billion as of June 30, 2013, up 7% as of June 30, 2012, and up 42% since fiscal-year-end 2009. Available funds covered fiscal 2013 operating expenses ($835.3 million) and outstanding debt ($1.13 billion) by a strong 4.7x and 3.5x, respectively. Like many private institutions with similar size endowments, Dartmouth maintains considerable exposure to alternative investments such as private equity and hedge funds. However, even when excluding these assets from available funds, Dartmouth's financial cushion remains solid.
Dartmouth's diverse stream of revenues adds to its financial flexibility. The college's largest revenue source is student-generated tuition, fees and auxiliary receipts, which accounted for 29.5% of unrestricted operating revenues in fiscal 2013. Grants and contracts, and investment income (including the endowment distribution) represented the second and third largest funding sources at 22% each.
In addition, consistent funding is derived from unrestricted gifts and clinical service revenue. Dartmouth's healthy fundraising ability was further evidenced by the recent receipt of a $100 million gift to support academics; the largest single gift in the college's history. Clinical service revenue reflects reimbursements to the college for activities performed by faculty of Dartmouth's Geisel School of Medicine at the Dartmouth-Hitchcock Medical Center (DHMC, revenue bonds rated 'A+' by Fitch). While DHMC is separately incorporated, its hospitals and clinics are closely affiliated with Dartmouth and serve as the main teaching site for the medical school.
EXPENDITURE GROWTH TRIMS OPERATING IMPROVEMENT
Following operating improvement as a result of several prudent measures taken by management, including tuition and fee increases and various expense reductions, Dartmouth generated positive GAAP-based operating margins of between 1.6% and 2.2% in fiscal years 2010 - 2012 (including endowment spending). However, operating performance weakened in fiscal 2013, with the margin falling to negative 0.3%, or roughly breakeven. Management attributes the decline in performance partly to a rebound in certain expense items that had been curtailed over the past few years, including investment in certain programs and faculty. On a GAAP basis, management anticipates another deficit for fiscal 2014.
Dartmouth's recent financial improvements were achieved concurrent with a reduced endowment distribution. After it reached a high of 7.2% in fiscal 2010, management gradually reduced its endowment distribution, which was viewed favorably by Fitch. The endowment distribution was 5.3% in fiscal 2013 for a total of $186 million, and is expected to have declined to 5% in fiscal 2014, remaining at the level going forward. Fitch believes sustaining the lower payout rate is realistic given the college's improved balance sheet resources. However, should operating performance remain at or below breakeven, a higher reliance on the endowment could ensue. The stable rating outlook assumes Dartmouth will maintain balance sheet liquidity at or above current levels.
HIGH, BUT MANAGEABLE DEBT BURDEN
Similar to many highly rated institutions, Dartmouth utilizes bullet maturities for certain debt issues. Consequently, the debt burden based upon maximum annual debt service (MADS; about $313 million in fiscal 2019) as a percentage of fiscal 2013 revenues is a very high 37.6%. MADS includes a $250 million principal payment related to Dartmouth's 2009 taxable debt (not rated by Fitch) issued solely for liquidity purposes, and which it intends to pay off at maturity.
When adjusting for the various bullet maturities, Dartmouth's average annual debt service (AADS) is more manageable at about $65 million and would consume a moderately high 7.8% of fiscal 2013 revenues. Moreover, net income available for debt service of $79.6 million (including endowment distributed for operations) provided sound 1.2x coverage. Concern regarding a debt burden of this magnitude is partially offset by Dartmouth's strong financial flexibility and market access. Fitch views Dartmouth's exposure to variable-rate debt (36% of total debt) and related interest rate hedges as manageable for the college; debt portfolio liquidity needs and counterparty exposure are carefully monitored by the college.
Dartmouth's capital needs remain manageable. The 2014 capital budget was $139 million, with a fiscal 2015 capital budget proposal of $54 million. The largest project currently underway is a new research building located at DHMC's campus in Lebanon, NH. The $116.5 million project commenced in May 2013 and is expected to be completed by Sept. 2015. It is being funded by gifts, reserves, equity from DHMC, and a portion of the proceeds of Dartmouth's series 2012 taxable bonds (not rated by Fitch).
There is no additional long-term debt planned at this time, although Dartmouth may bridge finance some project costs with commercial paper until pledged gifts are received. The taxable series 2012 bonds are expected to cover the capital budget over the near-term, with board approval required to draw upon the proceeds. To maintain its 'AAA' rating Fitch expects Dartmouth to manage any increase in financial leverage without materially weakening operating performance and/or its financial cushion.
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 Dartmouth College's (New Hampshire) Revs at 'AAA'; Outlook Stable' (May 1, 2012).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria