Fitch Rates University of Akron, OH's Revenue Bonds 'AA-'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to approximately $28.8 million University of Akron (UA) general receipts bonds, series 2014A (the bonds), which are expected to sell via negotiation the week of July 28. Proceeds of the bonds will be used to refund all of the outstanding series 2003A and series 2004B bonds and to pay costs of issuance.
In addition, Fitch affirms the outstanding ratings on the following bonds issued by UA:
--$380.4 million of outstanding UA general receipts bonds at 'AA-';
--$32.6 million of outstanding Summit County Port Authority (SCPA) student housing lease revenue bonds, series 2011 (UA student housing project) at 'AA-'.
The Rating Outlook is Stable.
General receipts bonds are special obligations of UA secured by a first lien on general receipts, which exclude state appropriations. Student housing lease revenue bonds are secured by a master lease agreement between UA and SCPA, with lease payments made by the university equal to annual debt service. Lease payments are general obligations of the university.
KEY RATING DRIVERS
STABILIZING CREDIT CHARACTERISTICS: The 'AA-' rating reflects UA's large enrollment base, modest but adequate balance sheet cushion, and limited capital needs. The Stable Outlook reflects steady state appropriations and the expectation of improvement in enrollment and financial performance in fiscal 2015. Offsetting factors include enrollment-driven operating pressure and a moderately high debt burden.
OPERATING IMPROVEMENT PROJECTED: Recent enrollment declines drove negative GAAP-based operating performance and lower debt service coverage in fiscal 2013. UA has made sizeable expense reductions in fiscal 2014, which Fitch believes will improve margins in fiscal 2015. Capacity to make further cuts or increase tuition prices is somewhat limited. Longer-term financial health will depend on enrollment trends.
ENROLLMENT PRESSURES PERSIST: Full-time equivalent (FTE) enrollment fell sharply by 6.5% in fall 2013, after falling 3.4% in fall 2012. A strategic tightening of admissions standards, along with a competitive market and unfavorable demographic trends in the region, drove the decline. Preliminary data shows that new admissions and retention are tracking ahead of the prior year although overall enrollment is expected to decline modestly in fall 2014. The rating and outlook assumes that improvements will materialize as expected by management.
ADEQUATE BALANCE SHEET CUSHION: UA's financial cushion remains stable. Available funds provide a modest but adequate cushion relative to operating expenses and outstanding debt despite a slight dip in balance sheet resources in fiscal 2013.
MODERATELY HIGH DEBT BURDEN: UA's moderately high pro forma debt burden is partially offset by its acceptable debt service coverage from operations, including endowment income, and limited capital plans going forward. Coverage levels have tightened in the past two years due to weaker operating margins.
OPERATING PRESSURE: Failure to show improvement toward breakeven or positive GAAP-based operating performance by fiscal 2015 would likely result in negative rating action.
DEBT MANAGEABILITY: The issuance of additional debt, while not anticipated, without a commensurate growth in financial resources and revenues would yield negative rating pressure.
Originally founded in 1870, UA is one of 13 public universities in the state of Ohio (general obligation bonds rated 'AA+'/Stable Outlook). In addition to its main 218-acre Akron campus, which is comprised of nine degree-granting colleges, UA has five other locations throughout northeast Ohio.
ENROLLMENT DOWN; STABILIZATION EXPECTED
FTE enrollment declined by 3.4% in fall 2012, followed by a sharp 6.5% decline in fall 2013. While the larger than anticipated decline reflects a competitive regional market, some declines were expected based on a shift in admissions strategy. UA, which had practiced open enrollment on its main campus, implemented a new structure with tighter admissions standards and more intensive advising and support for enrolled students. Fitch expects the new strategy to improve retention and graduation metrics, which are important under Ohio's performance funding system, but will continue to depress enrollment somewhat over the short term.
Preliminary data presented to Fitch suggests that the fall 2014 admissions will be stronger than fall 2013, while fall 2014 enrollment is expected to decline slightly as a result of smaller incoming classes in prior years. UA attributes this growth largely to improved recruiting practices including more effective marketing, better allocation of financial aid dollars, and pairing of admission decisions with aid packages for admitted applicants. Fitch expects UA's enrollment to stabilize and improve over the medium to long term based on preliminary admissions results and early indications of improving retention. Failure to realize such improvement would likely result in negative rating action.
FINANCIAL PERFORMANCE REMAINS PRESSURED
Larger than anticipated enrollment declines coupled with increased expenses drove a negative 3.6% operating margin in fiscal 2013, inclusive of endowment support. Fiscal 2014 operations are expected to improve toward breakeven on a full accrual basis largely due to significant expenditure reductions, despite further enrollment declines in fall 2013.
The fiscal 2015 budget remains pressured by limited tuition-raising flexibility, lower enrollment, and expense pressures. Positively, state operating appropriations were stable in fiscal 2013 and 2014, after declining in fiscal 2012 with the end of federal stimulus funds. State appropriations are expected to improve in fiscal 2015 given UA's solid performance funding metrics according to management.
Fitch expects investment grade institutions to produce breakeven results on average. Short-term fluctuations in operating performance are not necessarily a concern, although a trend of negative operating performance coupled with a shift in UA's enrollment strategy would negatively pressure the rating.
ADEQUATE BALANCE SHEET RESOURCES
Balance sheet resources have remained fairly stable over the past few years and provide a modest but adequate financial cushion. Available funds (cash and investments less nonexpendable restricted net assets) totaled $206.8 million as of June 30, 2013. Available funds covered fiscal 2013 operating expenses and pro forma debt by an adequate 40.8% and 45.4%, respectively.
The university also benefits from fundraising and endowment support. Having recently completed a $1 billion comprehensive campaign and experiencing strong investment returns in 2013, UA's endowment investments totaled $225 million in May 2014, held between the university and the legally separate UA Foundation. These donor-restricted funds are not included in available funds, but support the university's operations through annual distributions of investment income.
MODERATELY HIGH DEBT BURDEN
UA's debt burden is moderately high. Pro forma maximum annual debt service (MADS) of $47.2 million (in 2029), which includes a roughly $15 million bullet maturity, consumes a high 9.7% of fiscal 2013 operating revenues. Excluding the bullet maturity, adjusted MADS of $38.8 million (in 2018) is more manageable, consuming 7.9% of fiscal 2013 operating revenues. Pressured fiscal 2013 operations provided very slim coverage of adjusted MADS of 1.1x.
Fitch views the university's conservative debt profile, which is all fixed rate and primarily amortizing, as a credit positive. The current refunding will also generate a present value savings of approximately $1.5 million, using a level savings structure, with no change to the final maturity of the bonds. Following significant debt-funded capital expansion in recent years, UA has limited capital plans and no new debt plans in the near term.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 2014);
--'Fitch Rates University of Akron (Ohio) Revs at 'AA-'; Outlook Stable' (May 31, 2013);
--'Fitch Rates Ohio's $251MM GO Highway Bonds 'AA+'; Outlook Stable' (May 14, 2014).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria