Fitch Affirms Illinois Institute of Technology Rev Bonds at 'BB-'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB-' rating on approximately $189.3 million of outstanding Illinois Finance Authority revenue bonds issued on behalf of Illinois Institute of Technology (IIT, or the institute).
The Rating Outlook is Stable.
Revenue bonds are a general obligation of IIT. Additionally, IIT's series 2009 revenue bonds are secured by a cash-funded debt service reserve.
KEY RATING DRIVERS
OPERATING IMPROVEMENT MAINTAINED: In fiscal 2013, IIT continued its recent trend of recording positive operating results, as the institute had a 0.3% GAAP-based operating margin (including endowment distribution). While this is below the fiscal 2012 margin of positive 1.6%, it is IIT's second consecutive gain following several years of operating deficits.
MANAGEABLE DEBT BURDEN: Improved operations have enabled IIT to cover pro forma maximum annual debt service (MADS) from net operating income by over 1.5x for each of the past three fiscal years; 1.6x in fiscal 2013. Moreover, its debt burden remains manageable, with MADS consuming a moderate 6.1% of fiscal 2013 unrestricted operating revenues.
WEAK, BUT IMPROVING FINANCIAL CUSHION: IIT's balance sheet cushion remains weak, characterized by limited balance sheet resources relative to operations and debt. However, growth in available funds, driven in part by favorable investment returns and ongoing, planned reductions in its annual endowment draw resulted in improved liquidity metrics for fiscal 2013.
STEADY STUDENT DEMAND: The institute has a solid track record of generating stable student demand over the past several years, with growth in undergraduate enrollment offsetting recent softening in graduate program demand, notably law; which Fitch notes is consistent with national trends.
SUSTAINED OPERATING IMPROVEMENT: Sustained improvement in IIT's operating performance driven by recently favorable undergraduate and graduate enrollment trends could yield upward rating pressure.
BALANCE SHEET CUSHION: Despite a still weak balance sheet cushion, steady improvement in liquidity metrics, coupled with annual breakeven to positive operating results, could provide further rating momentum.
IIT is a private, technical engineering institute established in 1940. Located in Chicago, Illinois, IIT operates five campuses in the Chicagoland marketplace with its main campus located four miles from downtown Chicago. Fall 2013 headcount of 7,850 students and full-time equivalent (FTE) enrollment of 7,423 are up 2.2% and 3%, respectively, from fall 2012. Growth in undergraduate enrollment had offset softening in graduate program demand over the past few years, although graduate enrollment ticked up again in fall 2013. However, IIT's law school, which makes up about 13% of total enrollment, continues to experience enrollment declines, which Fitch notes is consistent with national trends. To date, management notes that undergraduate and graduate applications for fall 2014 are trending favorably to the prior year, indicating continued overall enrollment stability going into fiscal 2015.
Operating Improvement Maintained
IIT maintained its recent operating improvement in fiscal 2013, posting a positive 0.3% operating margin. While this is just above breakeven and below the prior year's level, it is IIT's second consecutive year with an operating surplus following several years of deficits. Operating stability continued to be driven by management's multi-year financial turnaround plan that has focused on various cost containment and revenue enhancement initiatives. Similar to many other private institutions, IIT's largest revenue source is student-generated revenue (57.3% of fiscal 2013 operating revenues), although it also benefits from grant and contract revenues which provide a modest level of revenue diversity.
Operating losses from prior years led IIT to rely more heavily on its endowment and to draw in excess of its stated endowment payout policy. However, the expense controls and revenue enhancement initiatives implemented over the past few fiscal years enabled IIT to annually reduce its endowment payout, with no excess draw needed since fiscal 2011; a factor viewed favorably by Fitch. Its total endowment draw declined to $10.7 million in fiscal 2013 from $13 million in fiscal 2012 and $15.6 million in fiscal 2011. The fiscal 2014 draw is similar to the fiscal 2013 level at about $11.1 million, which is in line with the institute's 5% spending policy and considered a sustainable level by Fitch.
Management's continued focus on conservative budgeting and financial planning are anticipated to yield another breakeven to slightly positive result for fiscal 2014. Based on unaudited interim results as of December 31, 2013 and favorable enrollment patterns, Fitch believes management's budget assumptions are realistic. Maintenance of at least a breakeven level of operating performance coupled with balance sheet liquidity remaining at or above current levels, could result in upward rating potential.
While IIT's participation in the U.S. Department of Education's (DOE) Student Financial Assistance (SFA) programs remains on provisional status, it was relieved of additional procedural and reporting requirements in 2013. This follows its release in 2012 from a requirement to post a letter of credit supporting a portion of its annual SFA volume, both of which Fitch views positively and indicates IIT's operating improvement. Based on its financial performance to date, IIT anticipates the provisional status will be lifted following the close of fiscal 2014; which would mark the third consecutive year of meeting DOE financial metric thresholds. Fitch will continue to monitor IIT's status, but believes its expectations are reasonable based on recent enrollment trends and operating results. Importantly, Fitch notes that IIT's provisional status has not adversely impacted demand or students access to federal aid.
Manageable Debt Burden
IIT's debt burden remains manageable, with MADS of approximately $16.2 million (fiscal 2024) consuming a moderate 6.1% of fiscal 2013 unrestricted operating revenues of $266.5 million (including endowment distribution). MADS includes about $1.5 million of debt service associated with IIT's research subsidiary, IITRI, that is non-recourse to the institute. IIT's lack of additional debt plans should serve to keep its debt burden manageable going forward. Moreover, as a result of its improved operating performance, IIT produced MADS coverage from net operating income of over 1.5x for each of the past three fiscal years; 1.6x in fiscal 2013. Fitch notes that IIT's leverage metrics as measured by burden and coverage compare favorably to those of other private colleges and universities similarly rated by Fitch.
Weak, But Improving Financial Cushion
One of Fitch's key credit concerns remains IIT's weak balance sheet cushion. However, despite fluctuating over the past few years, available funds (defined as cash and investments not permanently restricted) improved to $26.8 million as of May 31, 2013 from negative $2.3 million as of May 31, 2012. While available funds still only covered fiscal 2013 expenses and outstanding debt by a very low 10.1% and 12.4%, respectively, these metrics are the highest recorded in several years. Available funds improved further to $28.9 million as of Dec. 31, 2013 (unaudited).
IIT's ongoing fundraising campaign raised approximately $150 million to date towards its $250 million goal. Of the amount raised, about two-thirds have been collected. The campaign runs through 2016. A portion of campaign proceeds are expected to augment IIT's endowment, as well as fund certain capital expenditures. This should alleviate the need for any additional borrowing, which is viewed positively as Fitch does not believe IIT has any further debt capacity at the current rating level.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 10, 2013);
--'Fitch Affirms Illinois Institute of Technology Rev Bonds at 'BB-'; Outlook Stable' (Feb. 25, 2013).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria