NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to approximately $161.1 million of general obligation refunding bonds, series 2016M issued by Rutgers, The State University, NJ.
The bonds are expected to sell the week of Feb. 29, via negotiated sale. Proceeds will be used to refund all or a portion of the outstanding series 2009F bonds and to pay costs of issuance.
In addition, Fitch affirms the 'AA-' long-term ratings on the following series of bonds issued by or on behalf of the university:
--$1.51 billion of general obligation (GO) bonds;
--$237.1 million of New Jersey Economic Development Authority (NJEDA) GO lease revenue bonds (College Avenue Redevelopment Project), series 2013.
The Rating Outlook is Stable.
The series 2016M bonds are an unsecured general obligation of Rutgers, payable from all legally available funds and are on parity with outstanding general obligation bonds.
The series 2013 NJEDA bonds are secured by and payable from fixed rent payments made by Rutgers to College Avenue Redevelopment Associates, LLC pursuant to a master lease agreement. Rent payments, which match annual debt service on the bonds, constitute a GO of Rutgers, payable from all legally available funds and on parity with the university's outstanding GO bonds.
KEY RATING DRIVERS
STRONG DEMAND PROFILE: As the state's flagship institution of higher education and research, Rutgers enjoys strong student demand with growing enrollment and high student-quality indicators on its main campus, and robust fundraising ability. Counterbalancing these strengths is the relatively high tuition for a public institution, though common among New Jersey's public colleges and universities, and significant out-migration of the state's college-going population.
FULLY INTEGRATED PLATFORM: The 2013 integration of the majority of the former University of Medicine and Dentistry of New Jersey's (UMDNJ) medical schools into Rutgers is essentially complete. Fiscal 2015 is expected to be the final year to show some lingering expenses related to this integration.
PRESSURED OPERATING MARGINS: Operating margins the past three fiscal years have been negative, on a full accrual basis, as anticipated due to the integration; however, performance did see some recovery in fiscal 2015, and fiscal 2016 is expected to reflect continued improvement.
DIVERSE REVENUES; STATE FUNDING VOLATILITY: Rutgers' diverse revenue base, supported by consistent growth in enrollment and related net tuition and fee revenue, partially mitigates increased concern over weakness in state support.
BALANCED OPERATIONS: The Stable Outlook reflects Fitch's expectation that Rutgers University will return incrementally to balanced operations after successful integration.
STUDENT DEMAND: With approximately one-third of total operating revenues derived from student charges, rating stability is dependent on the university maintaining its strong student demand characteristics.
Originally chartered in 1766, Rutgers is one of the nation's nine colonial colleges, and became the state's land grant college in 1864. It is the flagship institution of public higher education and research in the state of New Jersey (rated 'A'/Stable Outlook by Fitch). It consists of 33 schools and colleges, including the Rutgers Biomedical Health Sciences (RBHS) division that was created by the UMDNJ integration in July 2013. Rutgers is situated on eight campuses throughout New Jersey encompassing nearly 6,000 acres. Five campuses are located in and around New Brunswick (collectively referred to as the New Brunswick campus) including the main College Avenue campus. The other three campuses are located in Newark and Camden.
Rutgers, the largest of New Jersey's 11 four-year public colleges and university, saw fall 2015 enrollment at a historic high of 67,556, reflecting a CAGR of 3.8% over the past five years and spread among the campuses. Since fall 2013, the total includes approximately 7,729 RBHS students. This level at this campus is expected to see some growth, with the potential increase of 100 new medical students.
Freshmen acceptance and matriculation rates have been fairly consistent and application volume remains substantial, with applications for fall 2015 increasing a healthy 12%. Of the 37,641 applicants, 67% were accepted for admission and of those, 33% matriculated. In addition, Rutgers has a growing level of transfer students, reaching 4,602 for fall 2015.
Student quality, as measured by standardized tests, has shown annual improvement at the New Brunswick campus, with the fall 2015 average SAT score of 1226, up from 1194 in fall 2011. It is expected that the scores may continue to improve given the fall 2015 opening of the Honors College of Rutgers.
UMDNJ Integration Complete; Uptick in Margin
As a large, comprehensive university, Rutgers benefits from a diverse revenue base, primarily composed of student-generated revenues (33.8% in fiscal 2015); state appropriations (22.6%); grants, contracts and governmental student aid revenues (22.6%) and healthcare services (15%). Post integration, the component shares have remained relatively steady.
As a result of the integration, Rutgers' GAAP-basis operating margin turned negative - moving from a positive 2% margin in fiscal 2012 to a negative 1.7% in fiscal 2013 and negative 2.6% in fiscal 2014. However, fiscal 2015 reflected some improvement, with the generation of a negative 1% margin. The final year of integration costs are reflected in 2015; improvement is again expected in fiscal 2016.
State Operating Support Remains Volatile
The absolute level of state support has shown slight growth in recent years; however, there are two components to this support: the first is the actual operating appropriations, while the other is the fringe benefits payment.
The effect of the fringe benefit increasing is the decline in operating appropriations. At this point, fiscal 2017 appropriations are anticipated to be flat; however, changes in fringe benefit costs may be required in order to maintain this relative stability.
Balance Sheet Cushion Adequate
Rutgers balance sheet remains modest, but adequate for the category. As of June 30, 2015, available funds totaled $1.43 billion, equal to 41% of expenses and approximately 67% of debt.
Cash and investments are divided between three categories: working capital/liquidity portfolio, long term investment pool (LTIP), and other endowments, restricted funds and plant funds. The market value of the LTIP, as of Dec. 31, 2015 (unaudited) was $912.6 million, with the largest portfolio components being hedge funds, at 24%, U.S. equity at 21%, and real assets at 13%. The endowment spending policy is to spend no more than 4.275% of the LTIP's 13-quarter average market value.
Manageable Debt Burden and Capital Plans
Rutgers' debt burden remains manageable, with debt service (excluding interest subsidies for Rutgers series 2010H Build America Bonds) consuming a moderate 4.5% of fiscal 2015 operating revenues.
Debt outstanding as of June 30, 2015 totaled $2.1 billion, including revenue bonds, commercial paper notes, capital and non-cancellable operating leases, and notes payable. This total includes approximately $500 million of former UMDNJ debt that Rutgers assumed as part of the integration.
The debt portfolio is largely fixed rate, with only two series structured as variable rate debt and par outstanding of $103.9 million. There are four interest rate swaps associated with the variable rate debt, with a notional value of $161.4 million. By May 2018, two of the four swaps will have terminated. The mark-to-market value as of Dec. 31, 2015 of the four swaps was negative $32.4 million, and required Rutgers to post collateral of $12.6 million. Fitch views Rutgers' level of exposure to variable rate and derivatives as modest relative to its financial cushion.
Rutgers has some ongoing capital projects, of which approximately $387 million has been state supported. Recently completed projects include a new honors college and parking garage, and a new building for the School of Arts and Sciences. At this time, there are no additional debt plans and no authorized projects. Fitch believes the university has sufficient capacity to absorb some additional debt, assuming operations stabilize.
Rutgers successfully closed a $1 billion capital campaign in 2014, reaching approximately $1.04 billion. Post campaign, there have been smaller fundraising initiatives, in line with the university's 250th anniversary.
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