Fitch Affirms Bethune-Cookman Univ, FL's Revs at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'A+' rating on approximately $21.6 million Higher Educational Facilities Financing Authority (HEFFA), FL revenue bonds issued on behalf of Bethune-Cookman University (BCU).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by loan payments made by BCU to HEFFA. These loan payments are an unsecured general obligation of BCU.

KEY RATING DRIVERS

HISTORICALLY POSITIVE OPERATING PERFORMANCE: BCU's operations have historically generated positive margins, averaging 5.6% over the past five years. Fiscal 2013 produced an operating deficit of 1.9%, but Fitch expects subsequent enrollment growth and careful budgeting to restore positive margins by fiscal 2015.

ENROLLMENT GROWTH: Enrollment has grown dramatically in the last two enrollment cycles driven largely by improved student retention. Headcount enrollment increased by roughly 7% in fall 2013, and fall 2014 preliminary figures show similar gains. Fitch expects enrollment growth and continued student retention improvement to drive positive operating performance, which depends heavily on net tuition and fees.

SOUND FINANCIAL RESOURCES: BCU's financial cushion remains sound for the rating category. Available funds, calculated by Fitch as cash and investments not permanently restricted, covered an adequate 79.4% of operating expenses and a strong 201.7% of long-term debt as of June 30, 2013.

MANAGEABLE DEBT BURDEN: The debt burden remains manageable, with maximum annual debt service (MADS) consuming a moderate 3.9% of fiscal 2013 operating revenues. BCU is contemplating an off-balance sheet, developer-financed dormitory project. Fitch will review the terms of any agreements and evaluate their effects on the university's credit profile.

RATING SENSITIVITIES

POSITIVE OPERATING MARGINS: Fitch expects a return to positive GAAP-basis operations by fiscal 2015 based on careful budgeting and demonstrated enrollment growth. Failure to generate positive operations in this time frame would likely lead to a downgrade.

ADDITIONAL DEBT: BCU's manageable debt burden is a key credit strength supporting the current rating. Responsibility for additional debt that materially increases the university's debt burden or leverage would negatively pressure the rating. Fitch will evaluate the effects of any off-balance sheet financings.

CREDIT PROFILE

BCU was founded in Daytona Beach, FL in 1904 by Mary McLeod Bethune, a major civil and human rights activist. The school was originally founded as an all-girls school for African-Americans. Subsequently, the school merged with Cookman Institute of Jacksonville, FL and later became affiliated with the United Methodist Church. Today, BCU is a co-educational institution and is one of the federally-designated historically black colleges and universities in the United States. At the time of publication, BCU had not submitted covenanted Continuing Disclosure documents to the MSRB since fiscal year 2011; the university is currently in the process of submitting the required documents.

HISTORICALLY POSITIVE OPERATIONS

BCU has historically generated soundly positive operating margins, averaging 5.6% over the past five years. However, the university produced an operating deficit of 1.9% in fiscal 2013, its first since at least 2005. Higher expenses and flat net tuition, constrained by level fall 2012 enrollment and moderately higher student aid, drove the deficit.

Management expects fiscal 2014 results to be somewhat improved from fiscal 2013. Given some turnover in senior staff following a recent presidential transition, effective management of expenses is particularly important. Fitch expects enrollment growth and careful expense management to drive a return to positive operations by fiscal 2015, and notes that continued negative margins would be inconsistent with the current rating level.

ENROLLMENT GROWTH

BCU's enrollment has grown significantly over the past two enrollment cycles. Headcount increased 7% from 3,543 in fall 2012 to 3,787 in fall 2013, and preliminary figures show similar growth in fall 2014. Most students (98% in fall 2013) are undergraduates. Enrollment growth has largely been driven by a larger freshman applicant pool in combination with improved student retention. While the freshman-to-sophomore retention rate has been stable at 63%, growth in the six-year graduation rate from 37% in fall 2011 (2005 cohort) to 56% in fall 2013 (2007 cohort) reflects better retention of upperclassmen, which has been a focus for BCU. The university reports that it was able to manage through recent Pell Grant eligibility changes and disruptions to a federal parent loan program without substantial loss of students. Fitch view this positively given the university's high exposure to these programs.

SOUND FINANCIAL RESOURCES

Balance sheet resources remained stable in fiscal 2013. Available funds of $55.1 million as of June 30, 2014 provided an acceptable cushion relative to the rating category of 79.4% of operation expenses and a strong 201.7% relative to total debt. BCU also benefits from its $53 million endowment (market value as of Aug. 5, 2014), part of which is board-designated and therefore included in available funds. The endowment value continues to grow due to a conservative 3% spending policy, aided by solid market performance in recent years.

MANAGEABLE DEBT BURDEN

The university's debt burden remains manageable, with MADS ($2.7 million occurring in fiscal 2015) consuming a moderate 3.9% of operating revenues. MADS coverage, historically over 2x, fell to 1.6x in fiscal 2013 due to weaker operations, but remains strong. At this time, management reports no new direct debt plans.

However, the university is contemplating an off-balance sheet developer-financed student housing project over the next year. Current on-campus housing capacity is insufficient to meet demand, and BCU has been leasing nearby hotel space to accommodate students. No such agreements have been finalized or approved, but Fitch will evaluate any off-balance sheet financing to determine the extent of the university's involvement and any effects on the university's credit profile.

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

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria', May 12, 2014;

--'Fitch Affirms Bethune-Cookman Univ, FL's Revs at 'A+'; Outlook Stable', Sept. 19, 2012.

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=867494

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Contacts

Fitch Ratings
Primary Analyst
Tipper Austin
Analyst
+1-212-908-9199
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Committee Chairperson
Charles Giordano
Senior Director
+1-212-908-0607
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Tipper Austin
Analyst
+1-212-908-9199
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Committee Chairperson
Charles Giordano
Senior Director
+1-212-908-0607
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com