CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' rating on the following outstanding bonds issued on behalf of Suffolk University (Suffolk):
--$66.3 million tax-exempt Massachusetts Development Finance Agency revenue bonds series 2010;
--$282.2 million tax-exempt Massachusetts Health and Educational Facilities Authority (MHEFA) revenue refunding bonds, tax-exempt series A and taxable B (2009).
The Rating Outlook is Stable.
The bonds are a general obligation of the university, secured by a mortgage on certain properties. The series A & B (2009 bonds) are additionally secured by a cash-funded debt service reserve.
KEY RATING DRIVERS
POSITIVE OPERATING MARGINS: Suffolk's consistently positive operating performance, adequate balance sheet ratios for the rating category, and adequate coverage of maximum annual debt service (MADS) support the 'BBB' rating.
HEAVY RELIANCE ON STUDENT REVENUES: Student-generated revenues provide nearly all of Suffolk's annual operating revenues, underscoring the need for carefully managed enrollment and budgeting, particularly given the highly competitive operating environment in New England and the university's large law school.
HIGH DEBT LEVERAGE: MADS is a very high 12.3% of fiscal 2014 operating revenues. The conservative fixed-rate debt structure, combined with the university's demonstrated ability to generate operating surpluses, adequate MADS coverage, and no additional debt plans somewhat mitigate this concern.
ENROLLMENT VOLATILITY: Suffolk has maintained positive operating margins in recent years even with undergraduate and graduate enrollment declines (particularly the large law school program). However, enrollment and net tuition revenue trends need to stabilize to support long-term operating performance.
INCREASED DEBT LEVERAGE: Growth in Suffolk University's already high MADS burden (12.3% in fiscal 2014) could negatively pressure the rating. Fitch does not view Suffolk as having any new debt capacity at this time.
MARGIN EROSION: Significant declines in operating margins or lower MADS coverage could trigger a negative rating action.
ENROLLMENT PRESSURES: Continued enrollment declines could reduce the university's balance sheet strength and financial flexibility and lead to a negative rating action.
Suffolk is a private university located in downtown Boston, Massachusetts and serves a diverse mix of undergraduate and graduate students. Originally founded in 1906 as a stand-alone law school, the university's programming expanded to include a college of arts and sciences (CAS) and the Sawyer business school. About 70% of the 7,451 fall 2014 full-time equivalent (FTE) students are undergraduates. Approximately 25% of undergraduate students live on campus. The business school provides both undergraduate and graduate education.
The law school has shrunk in recent years, but continues to be the largest graduate college at Suffolk. In fall 2014 it enrolled 1,333 FTE students, down from 1,466 in fall 2012, but still about 18% of total university FTE enrollment. Law school enrollment for fall 2015 is expected to decline again, but remain within budget assumptions. Declining law school enrollment is a national trend.
Senior management positions are now filled at the university. Suffolk welcomed a new president, Margaret McKenna earlier in 2015, a new provost was appointed in 2014, and a new senior vice president for advancement was just hired. Additionally, Suffolk has sold property that was not critical to institutional goals in recent years. The most recent sales were in July 2015; the $50 million proceeds are all planned to be spent for campus improvements within 1 - 2 years.
POSITIVE OPERATING MARGINS
Suffolk consistently produces positive operating margins (including the endowment draw). In the past seven fiscal years (2008 - 2014), margins averaged 5.5%. The operating margin for the fiscal year ending June 30, 2014 was 5.5%, and management projects fiscal 2015 operating results will be similar to fiscal 2014. Fitch views these consistent operating results as impressive given enrollment and expense stresses in recent years.
Net student tuition and fee revenue typically comprises a high 94%-95% of operating revenues. Fitch notes that net student revenue declined in both fiscal 2013 and 2014, and is projected to decline again in 2015. While management reports this is due to enrollment declines in the sizable law school as well as a large entering class (fall 2008) completing the academic cycle, such declines in the university's primary revenue source cannot be sustained long-term. However, Suffolk still produced a solid operating margin in fiscal 2014 and projected 2015 by managing expenses. The fiscal 2016 budget is balanced on a GAAP basis, but with a planned slimmer surplus due to higher interest and depreciation expense, campus improvement projects and one-time expenses related to a short-term lease-back of recently sold buildings.
Fitch views student fee dependence as a continuing challenge for Suffolk, particularly given the highly competitive New England higher education market. However, to date, Suffolk's conservative budgeting strategies have managed fluctuations in enrollment and net student revenue.
HIGH DEBT BURDEN BUT GOOD MADS COVERAGE
The university's operating surpluses somewhat help offset a MADS burden that Fitch views as high at 12.3% of fiscal 2014 revenues. However, net income available for debt service in fiscal 2014 provided a good 1.7x MADS coverage (MADS occurs in 2037), which partially mitigates concern regarding the university's ability to meet its obligations.
Suffolk's ability to demonstrate debt service coverage from operations is particularly important given its revenue concentration and enrollment volatility. Outstanding debt was about $345 million at June 30, 2015, which amount reflects -defeasance of $4.5 million of bonds in 2014 from real estate proceeds. The defeasance did not materially change MADS. The university has no new debt plans at this time.
BALANCE SHEET CONSISTENT WITH RATING CATEGORY
Available funds, defined by Fitch as cash and investments not permanently restricted, were $224 million at June 30, 2014, and have increased in each fiscal year since at least 2009. This represented 101% of fiscal 2014 operating expenses and 63% of outstanding debt, ratios Fitch considers consistent with the rating category. Based on preliminary information, available funds ratios for fiscal 2015 are expected to be similar to fiscal 2014. Continued generation of operating surpluses combined with no new debt should allow the university to maintain or grow available funds ratios over time.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. College and University Rating Criteria (pub. 12 May 2014)
Dodd-Frank Rating Information Disclosure Form