Fitch Rates New England Institute of Technology's (RI) Sr 2016 Rfdg Revs 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'A+' rating to approximately $40 million of series 2016 higher education facility revenue refunding bonds to be issued by the Rhode Island Health and Educational Building Corporation (RIHEBC) on behalf of New England Institute of Technology (NEIT).

The fixed-rate bonds are expected to sell via negotiation on or about Oct. 20. Bond proceeds will be used to refund outstanding series 2010A bonds and pay costs of issuance.

At the same time, Fitch affirms the 'A+' ratings on the following series of higher education facility revenue bonds issued by RIHEBC on behalf of NEIT:

--$11.9 million, series 2008;

--$36.9 million, series 2010A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by all available funds of NEIT and are further secured by a first mortgage lien.

KEY RATING DRIVERS

SOLID FINANCIAL OPERATIONS: The 'A+' rating reflects NEIT's solid financial profile, evidenced by the consistent generation of positive GAAP-based operating surpluses, strong debt service coverage, and healthy levels of unencumbered resources relative to operating expenses and long-term debt. Offsetting factors include historically cyclical enrollment, significant reliance on tuition and fee revenue, limited fundraising, and a high debt burden.

FINANCIAL FLEXIBILITY: Strong operating results reflect management's conservative budgeting and prudent management of internal resources as evidenced by the ability to generate consistent profitability in operations and maintain its policy of zero endowment reliance.

INCREASED BUT MANAGEABLE DEBT PROFILE: NEIT's debt burden is high, but Fitch considers it manageable due to NEIT's consistent operating surpluses resulting in adequate coverage levels and solid balance sheet resources.

RATING SENSITIVITIES

CAMPUS PROJECT: Increased project costs, additional debt or the inability to generate the necessary demand for student housing could pressure finances and negatively impact the rating for New England Institute of Technology.

ENROLLMENT SHIFTS: NEIT's inability to maintain or grow its enrollment while managing its operating results could pressure the rating.

CREDIT PROFILE

NEIT was founded in 1940 to provide hands-on technical training at a reasonable cost. The institution has three locations in Rhode Island: two (across 33 acres) in Warwick and the main campus in East Greenwich (220 acres). NEIT currently offers approximately 60 professional and technically focused undergraduate, graduate, and online programs.

ENROLLMENT SUBJECT TO VOLATILITY

Headcount enrollment at NEIT has been basically flat over the last three years after growing by 5.8% in fall 2013. Total headcount for fall 2015 was 2,922 compared to 2,942 in fall 2014. The growth in fall 2013 was largely driven by NEIT's investment in new professional programs and completion of a new campus in East Greenwich.

Management believes there is likely to be future enrollment traction as the result of adding a new position in August 2014 - Vice President of Enrollment, and the addition of several new programs in 2015 and 2016 including health care management, health and wellness, rehabilitation sciences, paramedic technology, and a master's in public health.

In addition, strategic initiatives to grow enrollment by offering a more traditional, residential campus are supported by NEIT's capital improvement plan which includes the construction of student housing on the East Greenwich campus. Currently, NEIT provides no student housing. Construction of the new 400-bed residence facility, which includes expansion of the dining and health facilities, is on time and on budget and is expected to be completed by July 2017.

STRONG OPERATIONS DRIVE RESOURCES

NEIT consistently generates double-digit operating margins, with the fiscal 2016 margin at 11.5% and the fiscal 2015 margin at 13.6%. Fitch views as a credit positive the institute's conservative management of resources and NEIT's ability to consistently generate strong operating profits, notwithstanding enrollment cycles.

Management has historically budgeted very conservatively - budgeting for deprecation and not drawing on endowment for operations providing financial flexibility. NEIT manages enrollment cyclicality by cutting variable costs; faculty is largely comprised of adjuncts. Financial flexibility is essential given the cyclical nature of some of the programs offered.

HEALTHY BALANCE SHEET

Historically strong operating performance has enabled NEIT to maintain its policy of zero endowment reliance and to build a healthy balance sheet. Available funds, defined as cash and investments not permanently restricted, totaled $169.5 million as of June 30, 2016 (which excludes the $60 million of bond proceeds associated with the series 2015 direct bank placement issuance).

Available funds relative to operating expenses ($64 million) and current long-term debt ($106.7 million at fiscal year-end June 30, 2016) remain strong at 265% and 159%, respectively. Given NEIT's strong reliance on student generated revenues this provides an important cushion. Fitch expects NEIT's strong operating performance will continue to drive growth in resources available to cover the increased debt service.

INCREASED DEBT LEVEL REMAINS MANAGEABLE

Inclusive of the series 2016 refunding bonds, NEIT's current long-term debt portfolio totals $106.7 million of which 10.5% are variable rate demand bonds supported by a TD Bank letter of credit, 33.8% are traditional fixed rate bonds and 55.7% are bank placed fixed rate bonds. The $40 million series 2016 revenue refunding bonds are fixed-rate, have the same maturity date as the series 2010A issue (for which proceeds from series 2016 are being used to refund), and are on parity with NEIT's outstanding bonds.

The $60 million series 2015 bank placed bonds are fixed-rate which amortize over 27.5 years and have a mandatory put in 15 years. Fitch views NEIT as having sufficient liquidity at this time (AF is $169.5 million) to cover a put. The series 2015 obligations are on parity with NEIT's outstanding bonds and contain financial covenants consistent with the series 2008 and series 2010A bonds.

With the $60 million series 2015 issuance, maximum annual debt service (MADS) increases to $6.9 million (in 2022) from $3.8 million. Savings associated with the series 2016 revenue refunding issuance decrease MADS to $6.7 million. The resulting MADS burden remains high at 9.3% of fiscal 2016 operating revenues, compared to 9.7% of fiscal 2015 operating revenues. The high debt burden is somewhat offset by NEIT's strong pro forma MADS coverage of 2.6x.

Additionally, the housing project is expected to generate net revenues. NEIT's operating margins and MADS coverage levels are significantly stronger than the median for 'A+' credits rated by Fitch.

Fitch notes that NEIT's declining debt service structure provides additional budget and debt flexibility. While the debt burden is high, Fitch expects it should remain manageable based on NEIT's historically strong operating performance and abundant resources. NEIT does not have plans to issue debt over the near-to-medium term.

Additional Disclosures: Fitch's rating relies on certain information provided by J.P. Morgan Chase, acting as underwriter.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012

U.S. College and University Rating Criteria (pub. 12 May 2014)
https://www.fitchratings.com/site/re/748013

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013023

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013023

Endorsement Policy
https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst:
Sahil Khera, +1-212-908-0868
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Committee Chairperson:
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Senior Director
or
Media Relations:
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elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Sahil Khera, +1-212-908-0868
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Committee Chairperson:
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com