NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA-' rating on the approximately $11.3 million Build NYC Resource Corporation, NY, tax-exempt revenue refunding bonds, series 2014 (Institute of International Education Project).
The Rating Outlook is Stable.
The bonds are an unsecured general obligation of IIE. There is no debt service reserve fund.
KEY RATING DRIVERS
KEY FACILITATOR OF INTERNATIONAL EDUCATION: The 'AA-' rating reflects IIE's distinctive role in administering and managing key components of international scholarship programs via cooperative agreements, grants or contracts (collectively, 'sponsored programs') for U.S. government agencies, various foreign governments, private corporations and foundations.
SOUND BALANCE SHEET AND OPERATIONS: IIE has maintained consistently solid liquidity levels. Operating performance has improved in recent years although it is typically near break-even due to IIE's business model. In addition, the institute's debt burden is low and there are no plans for new debt.
HIGH REVENUE CONCENTRATION: In light of its mission and business model, IIE's primary revenue stream is highly concentrated in sponsored program revenues (typically 95%), from a mix of various U.S. government agencies and international education contracts. Strong management and expense controls to adjust expenses to changes in sponsored program revenues provide rating stability.
EXPENSE MANAGEMENT: Institute of International Education's (IIE) ability to manage expenses as grants and sponsored program awards fluctuate (such as for the large Brazil program), and maintain at least break-even operating results, is key to supporting the rating.
PRESERVATION OF FINANCIAL RESOURCES: A material erosion in IIE's balance sheet strength, particularly relative to outstanding debt, could negatively impact the rating. While not expected, issuance of significant additional debt could also negatively pressure the rating.
IIE has had a unique and longstanding role since its founding in 1919 in administering and managing key parts of international scholarship and exchange programs, under sponsored programs and cooperative agreements with various U.S. government agencies, foreign governments, private corporations and foundations. Since 1946, IIE has been the principal partner of the U.S. Department of State and its public affairs section, U.S. embassies, and bi-national commissions abroad in administering Fulbright grants for international study at both the pre-doctoral and post-doctoral levels. It also contracts with foreign governments to perform educational exchange services. A large contract with Brazil began winding down in fiscal 2016.
IIE operates 19 offices and affiliates, primarily internationally, to facilitate its exchange operations, supporting both student and faculty exchanges. Its headquarters are in New York City. IIE has a large and prestigious board, currently numbering about 45 trustees. There are no term limits. Senior staff is stable, with routine turn-over.
STRONG BALANCE SHEET RELATIVE TO DEBT
IIE's solid balance sheet liquidity relative to debt supports the rating. Available funds (AF) are defined by Fitch as unrestricted cash and investments less permanently restricted net assets. AF totaled $154 million at Sept. 30, 2015, the most current audit available. This represented a robust 494% of outstanding debt (about $30 million in bonds and non-cancellable operating leases), and a slimmer 18.6% of operating expenses ($832 million, which includes significant pass-through tuition and stipend funds).
Most of IIE's temporarily restricted net assets ($56.1 million at FYE 2015) are related to programs and are not routinely available for debt service. Thus, Fitch adjusts the fiscal 2015 AF calculation to $98 million, equal to 315% of outstanding debt and 11.8% of expenses. Fitch views these adjusted ratios as adequate for the 'AA-' rating category due to the strong coverage of bonded debt, and the nature of IIE's business model, which typically produces balanced budgetary/cash-based results and slim GAAP results.
SLIM OPERATING MARGINS
IIE historically produces slim or break-even GAAP operating margins, although those margins have been stronger in recent years. Fitch views this as typical for research institutes or organizations such as IIE with significant sponsored program revenue. Fiscal 2015 results, as adjusted by Fitch, were positive $12.5 million or 1.5% of operating revenues.
Management estimates for the fiscal year ending Sept. 30, 2016 are closer to break-even. These results compare to a 1.7% margin in fiscal 2014, 2.4% in fiscal 2013, and 0.1% in fiscal 2012. The institute reports that the fiscal 2017 budget (which includes depreciation expense) could include some use of reserves for fundraising expenses.
IIE's revenue base is highly concentrated, with sponsored program or contract revenues typically accounting for nearly 98% of unrestricted revenues. Fundraising is not a major revenue component of IIE. Funding comes from multiple agencies and programs. Total sponsored program revenue increased from about $412 million in 2013 to $832 in fiscal 2015, and is estimated to be closer to $580 million in fiscal 2016.
In fiscal 2015, U.S. government agencies (including the Fulbright programs) comprised about 27% of sponsored program revenue, with foreign/international organizations at about 66%. The latter category includes Brazil program funds, much of which are pass-through tuition and stipends. The program started winding down in fiscal 2016 and the contract is expected to be largely finished by fiscal 2017. Management expects both related revenue and expenditures to be lower in fiscal 2017, and to balance each other.
IIE's sponsored program concentration exposes the organization to revenue risk, including potential cuts due to U.S. sequestration, program renewal risk, or program expirations. To date, management has successfully monitored and adjusted expenses to match revenue fluctuations. Strategically, IIE continues to focus on diversifying operating revenues.
SOLID BALANCE SHEET
A factor that partially offsets concern regarding revenue concentration and volatility is IIE's substantial unrestricted financial cushion, which could be used to repay debt if needed. IIE's endowment totaled $66.7 million at the end of fiscal 2015, which excludes substantial operating reserves. Cash and investments, including endowment but excluding sponsored funds received in advance, was a sizable $130 million at the same time. Fitch views IIE's operating reserves and positive cash flow as a credit strength given its significant revenue concentration. Long-term investments are conservative, and largely liquid.
LOW DEBT BURDEN
Debt burden was quite modest at less than 1% of fiscal 2015 operating revenues. This calculation included $11.3 million outstanding bonds and $18.8 million of non-cancelable operating leases. Bonded debt is all fixed-rate with level debt service. Management reports no new long-term debt plans.
Additional information is available at www.fitchratings.com
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Nonprofit Institutions Rating Criteria (pub. 05 Jun 2015)
Dodd-Frank Rating Information Disclosure Form