CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms the 'BBB+' rating on the $77.2 million series 2013 educational facilities revenue bonds issued by the Health and Educational Facilities Authority of the State of Missouri, on behalf of the St. Louis College of Pharmacy (StLCOP).
The Rating Outlook is Stable.
The bonds are a general obligation of the college, issued on parity with the $11.8 million outstanding series 2006 bonds. Neither issue has a debt service reserve fund. While the 2006 bonds are outstanding, security provisions include a mortgage and gross revenue lien. The college plans to refund the remaining series 2006 bonds in November 2014 via a private bank placement; at that time the 2013 bonds become an unsecured general obligation of the college.
KEY RATING DRIVERS
HISTORICALLY STABLE OPERATIONS: The 'BBB+' rating is supported by StLCOP's competitive admissions; historically stable enrollment; conservative budgeting; and history of not using its endowment draw, which factors to date have provided operating flexibility and supported endowment growth. Fitch views StLCOP's narrow academic niche and high student revenue concentration as a continuing challenge, particularly given the increase in the number of U.S. Pharm.D. programs over the last decade and more competition for students.
HIGH DEBT LEVERAGE: Debt leverage increased significantly with the series 2013 bonds, producing very high 16.6% MADS burden based on fiscal 2014 operating revenues. This will further increase when projected debt associated with phase II projects (estimated at $20-$25 million) is issued in calendar 2015. Fitch considers this burden very high, and a significant limiting credit factor, although it is partially mitigated by StLCOP's historical trend of balanced operating margins and positive MADS coverage.
ADEQUATE OPERATING MARGINS AND COVERAGE: StLCOP's audited operating margins were slightly negative in fiscal 2014 due to new faculty hires and accelerated depreciation expense; fiscal 2015 results are expected to be similar. When Fitch adjusts the college's margin for endowment draws (which the college typically does not spend), the margins remain positive, and pro forma MADS coverage is adequate. Maintenance of operating surpluses and solid coverage remain an important rating consideration.
NARROW ACADEMIC NICHE AND ENROLLMENT RELIANCE: StLCOP's concentrated academic program exposes it to industry risk, which is partially mitigated by historically stable enrollment, a selective demand profile, and continuing (but slower) demand for pharmacists. Tuition and fee dependence is consistently over 90% of audited operating revenues.
ENROLLMENT AND DEMAND: Total fall 2014 enrollment remains stable, but new student demand metrics weakened in fall 2014, the first class for the new seven-year academic cycle. Management attributes this to greater regional competition and a less robust market for new pharmacists in some regions of the U.S. Applications were lower for both transfer and new freshmen, resulting in still solid but weaker demand metrics. Fitch will monitor the next academic cycle, as stable enrollment is critical for StLCOP's financial stability.
SOLID BALANCE SHEET: Fiscal 2014 liquidity ratios are strong for the 'BBB' rating category and remain solid when projected phase II debt is included.
HIGH DEBT LEVERAGE: Growth in StLCOP's already high MADS burden, beyond the planned phase II financing (currently projected at $20-$25 million), could negatively pressure the rating.
MARGIN EROSION: A decline in debt service coverage or weakened operating margins (both adjusted for endowment draw) could trigger a negative rating action. To maintain the rating, generation of solid operating margins and MADS coverage is expected.
StLCOP is a private, non-profit college with a compact campus located in the St. Louis, Mo., medical campus near Washington University School of Medicine, Barnes Jewish Hospital and St. Louis Children's Hospital. It was founded in 1864 as a stand-alone pharmacy school, and principally offers a professional Doctor of Pharmacy (Pharm.D.) degree. Unlike most U.S. pharmacy programs, StLCOP accepts most of its students as freshmen instead of as junior year transfers.
Admissions are selective and enrollment has historically been stable. Fall 2014 headcount is 1,366, up slightly from 1,350 in fall 2013; this is the first admissions cycle at which entering students begin a longer seven-year academic term. The fall 2014 entering class, however, was somewhat smaller than expected, and applications were lower than in recent years. The fall 2014 class was 251, including 53 transfer students, which is weaker than projected. For comparison, the fall 2013 entering class was 281 including 29 transfer students, and the fall 2012 class was 298.
The series 2013 bonds and a projected $20-$25 million issuance in calendar 2015 support StLCOP's strategic initiatives. The strategic plan involves several components, including moving from a six-year to a seven-year Pharm.D. program and providing students a BS in health sciences after four years. Construction of a new academic building is in process and management reports it is on time and on budget. The next phase involves construction of a new student services building and additional housing; the related financing is expected in calendar 2015. The seven-year Pharm.D program does not require an increase in the number of matriculating students. Students remain an additional year in the undergraduate portion of the program. About 20% of students - mainly freshmen and sophomores - presently live on campus. This number is expected to increase after phase II housing and dining facilities are completed in several years.
POSITIVE FINANCIAL OPERATIONS
STLCOP has a history of positive operating margins, although those margins have slimmed in recent years, and were slightly negative in fiscal 2014. In the past five fiscal years (2008 - 2013), surpluses averaged 6.2%, with results for 2012 and 2013 were 3.3% and 2.6%, respectively. Fiscal 2014 operating results were negative $711,000 (a negative 1.9% margin), which management attributes to new faculty hires associated with the strategic plan and accelerated depreciation expense of about $700,000. Fitch views these operating results as somewhat understated compared to peer institutions, as StLCOP routinely does not utilize its board-approved 5.5% endowment draw (it periodically budgets for a portion of it, but historically has not used it, including in fiscal 2014). When the fiscal 2014 draw (about $6.5 million) is included in audited operating revenues, the operating margin is healthy; it would have been 13.2% for fiscal 2014, and about 16.7% for fiscal 2013.
Management projections for fiscal 2015 are expected to be similar to fiscal 2014, with a slight GAAP operating deficit and stronger returns when adjusted for the endowment draw. Fitch expects StLCOP to improve its audited operating results over time, and stabilize demand to sustain the rating. Consistent operating results and stable enrollment are important factors in providing flexibility given the college's high debt burden, concentrated revenue base, narrow academic niche, and increasing student competition.
Student generated revenue is typically 90% of StLCOP's operating revenue, and while not unusual for peer institutions, this results in significant reliance on enrollment. The college has historically demonstrated strength in managing this key revenue stream, as net tuition and fees have consistently increased since at least fiscal year 2007 (they were up 8.3% in fiscal 2014, and 9.2% in fiscal 2013).
HIGH DEBT LEVERAGE
Outstanding debt at June 30, 2014 is $89.4 million, a significant increase from the $35 million outstanding in fiscal 2013. Proceeds from the series 2013 bonds funded about $55 million of phase I capital projects, including a new six-story academic building with auditorium, library, faculty offices and laboratory space, demolition of an existing student center, and issuance expenses and capitalized interest. An additional issuance of $20-$25 million is expected in calendar 2015 to fund the phase II projects (student housing, dining and related facilities), which could increase debt to around $114 million. The college is in the quiet stages of a capital campaign, and is expecting about $10 million of future gifts as a capital funding source. In addition, it is expecting to apply some unrestricted endowment (perhaps $10-$15 million) towards the phase II projects.
The MADS burden grew to $6.3 million in fiscal 2026, a very high debt burden of 17% based on audited fiscal 2014 operating revenues. After issuing debt for the phase II projects, the MADS burden could rise to 19% of operating revenues. While the debt burden is exceedingly high, Fitch believes StLCOP's operating performance and financial flexibility somewhat mitigate this concern. No additional debt is expected after the phase II funding.
Outstanding debt is fixed rate with serial amortization. When the phase II bonds are issued, the college expects to 'wrap' the debt service, resulting in an overall level debt service structure through 2044. A portion of the series 2006 bonds were refunded with the series 2003 bonds. The remaining $11.8 million portion (which matures in 2027) is expected to be refunded in November 2014 through a bank placement. At this time the expected bank loan structure is amortizing fixed rate with a 10.5 year rate reset (but not a mandatory call), with the same security covenants as the series 2013 bonds. Fitch will review final documents when they are available.
POSITIVE PROFORMA COVERAGE
MADS coverage for StLCOP's $89.4 million debt was 1.6x in fiscal 2014 after Fitch adjusted net income for the unused endowment draw ($6.5 million). MADS coverage including an estimated $20 million phase II financing (about $7.2 million MADS) was slimmer but still positive at about 1.3x. Fitch views MADS coverage as consistent with the rating category. To support the current rating over time, Fitch expects the college to consistently generate positive operating margins to support phase II debt and higher depreciation expense related to the new construction.
STRONG BALANCE SHEET
Available funds (defined by Fitch as cash and investments not permanently restricted) were $143 million at June 30, 2014. This represented 160% of then-outstanding debt of $89.4 million and about 130% of pro forma debt, including the expected $20 million phase II issuance. Both of these ratios remain quite strong for the 'BBB' rating category. AF relative to fiscal 2014 operating expenses was significantly stronger for the rating category at 371%. Fitch considers the college's balance sheet strong enough that a one-time use of endowment (perhaps $10 to $15 million) towards the phase II capital funding is not a negative factor.
StlCOP had a $145.8 million endowment at June 30, 2014, most of which was unrestricted. Even though the college adjusted its asset allocation in fiscal 2014, Fitch considers it somewhat aggressive given the college's enrollment, capital plan, debt burden and narrow academic offerings. The target allocation is approximately 44% equities, 15.6% fixed income and cash, 8.2% private equity, 20.2% commodities, and 12% hedge funds.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 2014);
--'Fitch Rates St. Louis College of Pharmacy, MO, Ser 2013 Rev Bonds 'BBB+'; Outlook Stable' (October 2013).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria