Fitch Affirms Midland University, NE's Revs at 'B'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms approximately $16.9 million of education facility revenue bonds issued by the Nebraska Educational Finance Authority on behalf of Midland University (MU or the university), formerly known as Midland Lutheran College, at 'B'.
The Rating Outlook is Stable
The bonds are a general obligation of the college, additionally secured by a cash-funded reserve funded at maximum annual debt service.
KEY RATING DRIVERS
INCREASING OPERATIONAL STABILITY: The 'B' rating reflects Midland's second consecutive positive operating margin as a result of ongoing expense controls, fund raising and debt reduction, all of which serve to stabilize the outlook for the university.
ENROLLMENT GROWTH: Headcount increased to 1,307 students, up from 977 in fall 2011; Midland seeks to grow its head count through graduate programs as well as a high school scholar program which is intended to create a pipeline of future local demand.
LIQUIDITY LIMITS FLEXIBILITY: MU's financial cushion while improved from the previous year is very weak. MU has already borrowed against its endowment and could require additional operational support if enrollment trends stumble. MU has started paying down its internal borrowings in FY2014 however the university will require multiple years of positive operating results to achieve a measurable level of unrestricted financial resources.
HIGH DEBT BURDEN: Maximum annual debt service (MADS) accounts for a high 11% of unrestricted operating revenue. FY 2013 net income available provided 1.2x MADS coverage, which though weaker than FY2012 was improved from the years prior.
SUSTAINED FINANCIAL IMPROVEMENT: The persistence of improved financial metrics evinced by increasingly consistent positive margins, enrollment growth, student retention and reduced reliance on non-recurring gifts and contributions could improve the rating over time.
ADDITIONAL DEBT: The incurrence of additional debt for any operational or expansionary purpose without commensurate growth in resources to service that debt will negatively pressure the rating.
Midland University, re-branded in 2010 from Midland Lutheran College, is a private, co-educational liberal arts college located in Fremont, Nebraska, approximately 35 miles northwest of Omaha. The college primarily serves undergraduate students, and expanded its masters programs in education and professional accounting to include business administration, in fall of 2012. MU is affiliated with the Evangelical Lutheran Church in America.
OPERATING MARGINS SETTLING
MU's fiscal 2013 margin of 3% showcases a second year of positive operations. A combination of higher tuition and fee revenue along with non-recurring gifts resulted in a net excess for fiscal 2013. University operations improved in fiscal 2013 while gifts and contributions continued to support margins and obviate operating deficits. Based on rebalancing efforts MU has moved closer to achieving break-even operations excluding onetime non-recurring gifts. Including unrestricted contributions, and support from a robust year over year enrollment trend, MU's financial performance has improved markedly.
A relatively high tuition subsidy/discount of 54.6% continues to offset tuition revenue growth but overall discounting is expected to diminish once the current student classes graduate. The university's practice of regularly increasing tuition (5% for fiscal 2014) partially offsets the aforementioned discounting levels.
Demand trends are positive. MU had a headcount of 1,192 undergraduates this past fall enrolling 19 high school juniors and seniors in the high school scholar program that allows juniors and seniors to take up to twelve college level course credits while still in high school. The university passed its target enrollment of 1,300 students this past fall and expects to improve retention and graduation rates by utilizing predictive software and staff and affecting student persistence through frequent staff interaction.
Enhanced offerings and aggressive marketing are driving demand, including a new MBA program in spring of 2013, a successful RN to BSN program for nursing and successful undergraduate recruitment efforts. MU's ability to realize enrollment growth and maintain stable enrollment levels is critical to improving its credit profile.
WEAK FINANCIAL CUSHION
MU's rating remains hinged to its diluted liquidity profile. Available funds, defined as unrestricted cash and investments, totaled $960 thousand at May 31, 2013, improving from approximately negative $1.2 million at May 31, 2012. While Fitch acknowledges MU's success in raising unrestricted funds in fiscal 2012 and to a lesser degree in fiscal 2013, the severely depleted endowment balance reduces operational flexibility which is imperative for a school with essentially one concentrated revenue source.
MU's internal borrowing from its permanently restricted endowment pool increased to $7.9 million in fiscal 2013. Investment gains and contributions increased the modest relative balance of the endowment to $8.3 million from $6.8 million. The repayment of these internally designated loans commenced in fiscal 2014 from all available sources of revenue. Fitch views this low level of operating flexibility as a key vulnerability.
HIGH DEBT BURDEN
MU's long-term debt was reduced as a result of loan forgiveness and subsequent note payoff in June of 2012. Outstanding debt includes approximately $16.9 million of fixed-rate bonds and $0.4 million of notes and capitalized leases. MADS ($2.3 million , 2029) burden remains high at 11% of unrestricted operating revenue. For fiscal 2013, annual debt service, including notes paid off in June of 2012 increased to $3.3 million, 15.6% of unrestricted operating revenue with coverage of 0.8x. MADS coverage from net income for fiscal 2013 was just sum sufficient at 1.2x, but expected as fiscal 2012 operations which covered MADS 2.3x benefitted from the receipt of non-recurring gifts and contributions.
MU entered into a lease agreement with an option to purchase the Dana College property in Blair, NE, in July of 2013. The lease extends to July of 2018. The intention of MU is to potentially expand into the second campus with approximately 600-700 students. In the meantime, the university pays rent and undertakes all operating costs of the facility under this lease while seeking to raise funds to purchase and renovate the facility in the future. While there are no concrete plans thus far, Fitch expects that no additional debt will be incurred to acquire the property. The likelihood of additional debt for the acquisition of the property could negatively pressure the rating.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (May 2013);
--'College and University Rating Criteria'(June 2013);
--'Fitch Affirms Midland Lutheran College, NE's Revs at 'B'; Outlook to Stable' (Feb 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria