Fitch Affirms Methodist University's Revs at 'BBB'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms its 'BBB' rating on approximately $16.9 million North Carolina Capital Facilities Finance Agency revenue bonds, series 2012 issued on behalf of Methodist University (MU, or the University).
The Rating Outlook is Stable.
The bonds are a general obligation of the university. Further securing the bonds are a fully funded debt service reserve fund (DSRF) and a mortgage on the core campus.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'BBB' rating primarily reflects a track-record of healthy operating performance, which supports good debt service coverage, and improving enrollment trends. Counterbalancing factors include a relatively small enrollment base, very high reliance on student charges for operating revenues, and significant exposure to variable rate demand bonds (VRDBs) and related risks.
POSITIVE OPERATING PERFORMANCE: MU's GAAP-based operating margin, though weakened in fiscal 2013, remained positive, which is consistent with Fitch's expectations for private colleges and universities. Based on interim financials, fiscal 2014 year-end results are expected to be comparable to the preceding year.
IMPROVING ENROLLMENT TRENDS: MU's fall 2013 incoming freshmen class reflected a five-year high; however, the revenue impact is expected to be tempered by increased financial aid assistance and a tuition increase that was below-average relative to historic increases. Preliminary admissions statistics for fall 2014 are trending ahead of the same time last year.
LIMITED REVENUE DIVERSITY AND LIQUIDITY: MU regularly derives over 85% of unrestricted operating revenues from student tuition and fees. While this level of reliance on student charges is not atypical for private colleges, prudent enrollment forecasting and management is integral, particularly in light of MU's balance sheet strength.
SIGNIFICANT EXPOSURE TO VRDBs: MU's floating rate debt is high at 52.5% of the debt and 50% is un-hedged. Fitch believes the rating level denotes MU's limited ability to manage the potential risks presented by its variable rate exposure. Debt-plans at present time are limited and are not expected to materially impact existing debt manageability.
MARGIN EROSION: Given the university's limited balance sheet flexibility, rating stability is contingent upon the continued generation of positive GAAP-based operating performance. Unmanaged fluctuations in student demand could negatively impact financial performance and drive downward rating pressure.
DEBT MANAGEABILITY: While not anticipated at present time, the issuance of additional debt beyond stated plans without a commensurate growth in financial resources and revenues would yield negative rating pressure.
Methodist University, located in Fayetteville, NC was founded as Methodist College in 1956, initiated operations in 1960 and graduated its first class in 1964. The university serves a diverse set of traditional residential students, commuters, soldiers from a nearby military base, Fort Bragg (the base) as well as evening and part-time students. The university's regional accreditation with the Southern Association of Colleges and Schools Commission on Colleges was most recently re-affirmed in 2009 for a 10-year term.
ADEQUATE FINANCIAL PROFILE
Fiscal 2013 operations, adjusted for the endowment payout, generated a 1.3% margin, weaker than the preceding three-year average of 6.2%. Fiscal 2013 total operating revenues declined by 0.5%, in part due to an enrollment dip in fall 2012 that adversely impacted student-derived income. Simultaneously, total operating expenses rose by 3.4%, due primarily to compensation-related adjustments and an increase in interest and depreciation-related expenses. MU's six month financial results (as of December 2013) indicate a comparable margin for fiscal 2014, supported by growth in fall 2013 total headcount enrollment and related student-derived revenues.
Fitch considers positive operating stability to be integral to rating stability, particularly in light of the university's limited balance sheet flexibility. Available funds, defined as cash and investments less permanently restricted net assets, totaled $18.4 million as of June 30, 2013, above the $16.4 million recorded in the prior year-end. Balance sheet growth has been supported by the retention of annual operating surpluses for the purposes of pursuing future capital expenditures.
Fiscal 2013 available funds comprised 38.7% of fiscal 2013 operating expenses and 48.2% of pro forma debt. These metrics are consistent with the 'BBB' category for Fitch-rated private colleges and universities, but nevertheless represent a limited capacity to response to unplanned operating deficits or a market downturn.
IMPROVING ENROLLMENT TRENDS
Typical of regional private universities, MU relies primarily on tuition, fees, and auxiliary revenue for its operations. Of the total, at least 85% of operating revenues are regularly generated through student tuition and fees. Fall 2013 total headcount enrollment grew by 4.4% over the prior year, to 2,463, supported by the largest incoming freshmen class in the university's history. To help bolster enrollment, management limited the tuition increase to 3.49% for academic year 2013-2014, which was below-average relative to historic increases, and increased funds for financial assistance.
Management expects to provide additional institutional aid in fiscal 2015; however, this will be supplemented with adjustments in student charges, which is expected to support continued revenue growth. Further, preliminary admissions statistics suggest that undergraduate enrollment growth will continue for fall 2014, which will enhance revenue generation. Management reported that no significant expense pressures are being anticipated in the fiscal 2015 budget.
Importantly, active duty soldiers and military-related students (e.g. veterans, spouses, dependents, etc.) regularly represent approximately 20% of total headcount enrollment, which underscores the university's significant exposure to military personnel and related federal benefits. Military tuition assistance was temporarily suspended as a result of sequestration, which affected students in the spring and summer 2013 terms; however, funding has since been restored and no cuts are anticipated at present time. Furthermore, the maximum tuition reimbursement for private colleges and universities under the post-911 GI bill increased for academic year 2014-2015, which is a credit positive for MU's enrollment base.
SIGNIFICANT EXPOSURE TO VRDBs
Existing debt, outstanding in the approximate amount of $37.6 million, includes 2012 fixed rate bonds ($16.9 million) and series 2005 VRDBs ($18.7 million). The VRDBs are supported by Wells Fargo Bank, N.A. (rated 'AA-'/Outlook Stable/'F1+' by Fitch) letter of credit (LOC). Management recently renewed the LOC for an additional three-year term (expires Oct. 15, 2016). Fitch notes positively that the university continues to maintain satisfactory headroom under the financial covenants associated with the LOC.
MU has swapped 50% of the series 2005 variable-rate debt to fixed rate with Bank of America, N.A. and Wells Fargo, N.A., both of which expire in March 2020 and do not require collateral postings. The unhedged portion of variable-rate debt accounted for 26.3% of the total debt portfolio as of June 30, 2013, which is atypical relative to other Fitch-rated private colleges and universities in the 'BBB' rating category.
MU's maximum annual debt service (MADS), which comes due in fiscal 2030 and assumes an interest rate of 3% on the un-hedged portion of variable rate debt, represented a moderate 6.1% of fiscal 2013 unrestricted operating revenue and compares favorably to 'BBB' rated medians. Fitch notes positively that MU regularly generates good coverage of pro forma MADS from net available income (1.7x in fiscal 2013). Current debt service coverage for fiscal 2013 was a stronger 2.1x.
The university is presently in the midst of a $35 million capital campaign, $20 million of which is in support of various capital projects. Near-term debt plans are limited to a manageable $4.5 million commercial loan to help partially fund the construction of a new Health Sciences Building to house new (Doctorate of Physical Therapy and Masters of Occupational Therapy) and existing (Applied Science and Athletic Training) programs. The remaining portion of the project, which is estimated to cost $12 million, is expected to be funded through fundraising and internal reserves.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'College and University Rating Criteria,' dated May 2014;
--'Fitch Affirms Methodist University's Revs at 'BBB'; Outlook Stable,' dated June 28, 2013.
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria