NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to approximately $22.9 million of series 2016 higher education revenue bonds to be issued by Coastal Carolina University, SC (CCU, or the university).
The fixed-rate bonds are expected to sell competitively on Nov. 1. Bond proceeds will be used to renovate and expand Brooks Stadium and pay associated costs of issuance. At the same time, Fitch affirms the 'A+' ratings on the following CCU higher education revenue bonds:
--$85.3 million series 2015;
--$35.5 million series 2014;
--$53.3 million series 2013.
The Rating Outlook is Stable.
SECURITY
Revenue bonds are a special limited obligation of CCU, payable solely from and secured by a pledge of net revenues. Pledged revenues include all revenues except appropriations received from the general assembly and institution tuition moneys collected to pay debt service on state institution bonds issued on behalf of CCU (rated 'AAA').
KEY RATING DRIVERS
SOUND OPERATING PERFORMANCE: The 'A+' rating primarily reflects CCU's consistently positive operating results. Offsetting credit factors include a slim balance sheet cushion, an atypically high reliance on student-generated revenues for a public university, and a high pro forma maximum annual debt service (MADS) burden.
GROWING STUDENT DEMAND: Enrollment has grown steadily over the past several years as demand remained strong from both in-state and out-of-state applicants. CCU's revenue mix benefits from out-of-state tuition which contributes to the university's positive operating results.
HIGH THOUGH MODERATING DEBT BURDEN: CCU's financial leverage increased considerably in recent years as the university built out its physical plant. This has resulted in a high pro forma debt burden of 8.9%; however, most recent debt-financed projects are expected to be self-supporting. The university does not have debt plans over the medium term beyond series 2016.
LIMITED RELIANCE ON STATE SUPPORT: State appropriations are not a significant source of operating revenue (5.8%), resulting in CCU's high tuition dependency for a public institution. CCU also benefits from a local optional sales tax dedicated to capital.
RATING SENSITIVITIES
ENROLLMENT STABILITY: Given Coastal Carolina University's high concentration in student revenues, growth in net tuition revenue will be instrumental to maintaining breakeven-to-positive operating margins and meeting debt service obligations.
ADDITIONAL DEBT: Based on CCU's limited balance sheet cushion relative to debt and its high pro forma debt burden, the university has limited additional debt capacity. Additional debt without commensurate growth in revenues or balance sheet resources could pressure the rating.
CREDIT PROFILE
Located in Conway, SC, CCU was founded in 1954 by Horry County citizens as a two-year college. In 1958, CCU became a campus of the University of South Carolina system and in 1974 it began awarding four-year baccalaureate degrees. It became an independent state supported institution in 1993. Today, CCU offers undergraduate degrees in 69 fields of study, 18 master's degree programs, and one doctoral program. CCU is unusual in that it benefits from a portion of the one-cent local sales tax, charged by Horry County on most taxable goods and services, which is dedicated to capital needs. In fiscal 2016, CCU received $9.7 million in revenue from this tax, and has received more than $57 million in revenue since fiscal 2009.
The university announced in September 2015 that it would leave the Big South Conference and transition to the football bowl subdivision in the Sun Belt Conference. The transition should be completed in full by the 2017-2018 academic year. Conference requirements include a larger capacity athletic stadium, and CCU is expanding and renovating Brooks Stadium to meet the 15,000-seat minimum. Proceeds from the series 2016 issuance will fund part of the project cost; the balance will come from institutional capital finds, a donation from the Chanticleer Athletic Foundation, and state appropriations. Current capacity for Brooks Stadium is 9,200; management indicated that ultimately the stadium will increase capacity to seat 20,700.
ENROLLMENT DRIVES OPERATIONS
Headcount grew modestly in fall 2016 following growth in 2015 and significant growth in fall 2014. Fall 2016 headcount grew to 10,482, up 2.1% from fall 2015, and up 12.3% since fall 2012. Full time equivalent (FTE) enrollment grew to 9,888, up 11.6% over the same five-year period. Growth is mostly attributed to undergraduate students which make up 93% of enrollment. Fall 2016 graduate student enrollment was also up at 726 students (FTE of 386).
Management reports that new housing and recent athletic program success have contributed to CCU's healthy demand trends. Freshmen applications have increased substantially. Fall 2016 freshman acceptance rates were modestly selective at 61.2%; matriculation rates of 20.8 % reflect a competitive market. Student quality is slightly higher than the national average. Out-of-state students typically make up nearly half of CCU's student population. About 43% of students reside on campus; there is a freshmen/sophomores residency requirement.
CCU's in-state tuition ($10,876 in fall 2016, to be reflected in fiscal 2017) remains competitive for public teaching institutions; management reports the board remains conscious of affordability. Undergraduate resident tuition increased 3.29% for fiscal 2016 and 3.9% for fiscal 2015, following no increase for fiscal years 2013 and 2014. Tuition increases were partly in response to the lower state appropriations in those years.
POSITIVE OPERATING PERFORMANCE
CCU's fiscal 2016 operating margin (3.2%) represented at least the fifth consecutive year of positive operating performance. For fiscal 2016, operations benefited from a 9.5% increase in net tuition revenue, a 3% increase in in-state tuition, and modest enrollment growth. For fiscal 2015, CCU's results were supported by undergraduate enrollment growth and modest tuition increases.
The university's positive operations are somewhat tempered by its concentration of student revenue (73% of fiscal 2016 operating revenues), which is relatively high for a public institution. State appropriations represented just 5.8% of operating revenue. While not included in operating revenue, CCU benefits from a property tax millage within Horry County (GOs rated 'AA+') and a portion of a county-wide local option sales tax (collected through fiscal 2024). These capital funding sources are unusual for a public university, and help support capital needs.
SLIM FINANCIAL CUSHION
Balance sheet resources remain limited, although still adequate for the 'A+' rating category. Available funds, defined as total cash and investments less non-expendable restricted net assets, totaled $60.4 million as of June 30, 2016 and represented a low 30% of fiscal 2014 operating expenses ($203.5 million) and 23% of pro forma debt (about $262.4 million). Debt includes university revenue bonds (about $210.7 million) and state institution bonds (about $51.7 million).
HIGH MADS BURDEN
Fitch considers CCU's debt structure conservative. All revenue bonds are serial fixed-rate with a somewhat front-loaded schedule. Post issuance, total debt outstanding will be approximately $262.4 million.
Pro forma MADS is about $18.8 million (fiscal 2017), with average annual debt service of roughly $13.8 million. CCU's pro forma debt burden remains high, with MADS equal to 8.9% of fiscal 2016 operating revenues ($210.2 million). However, the burden has moderated from about 9.7% in fiscal 2015. Partially offsetting the high burden is CCU's consistent generation of MADS coverage from net operating income. MADS coverage was over 1.0x in each of the past five fiscal years (1.2x in fiscal 2015, 1.5x in fiscal 2016).
Fitch notes positively that CCU's debt-financed housing facilities are expected to be self-supporting, which further mitigates the high burden. CCU has no significant additional debt plans at this time.
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
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013730
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https://www.fitchratings.com/regulatory
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