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Fitch Affirms Suffolk University, MA Bonds at 'BBB'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' rating on the following outstanding bonds issued on behalf of Suffolk University (Suffolk):

--$66.3 million tax-exempt Massachusetts Development Finance Agency revenue bonds, series 2010;

--$290.7 million tax-exempt Massachusetts Health and Educational Facilities Authority (MHEFA) revenue refunding bonds, tax-exempt series A and taxable B (2009).

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of the university, secured by a mortgage on certain properties. The series A & B (2009 bonds) are additionally secured by a cash-funded debt service reserve.

KEY RATING DRIVERS

POSITIVE OPERATING MARGINS: Suffolk's consistently positive operating performance, adequate balance sheet ratios for the rating category, and adequate coverage of maximum annual debt service (MADS) support the 'BBB' rating.

HEAVY RELIANCE ON STUDENT REVENUES: Student-generated revenues provide nearly all of Suffolk's annual operating revenues, underscoring the need for carefully managed enrollment and budgeting, particularly given the highly competitive operating environment in New England and the university's large law school.

HIGH DEBT LEVERAGE: MADS is a high 12.2% of fiscal 2013 operating revenues. The conservative fixed-rate debt structure, combined with the university's demonstrated ability to generate operating surpluses, adequate MADS coverage, and no additional debt plans somewhat mitigate this concern.

ENROLLMENT VOLATILITY: Suffolk has maintained positive operating margins in recent years even with undergraduate and graduate enrollment declines (particularly the large law school program). However, enrollment and net tuition revenue trends need to stabilize to support long-term operating performance.

SENIOR MANAGEMENT CHANGES: Suffolk's new president resigned recently after only two and a half years, leaving the university with an interim president and a new provost. While other senior positions have been more stable, these high level position turn-overs are a credit concern.

RATING SENSITIVITIES

INCREASED DEBT LEVERAGE: Growth in Suffolk's already high MADS burden (12.2% in fiscal 2013) could negatively pressure the rating.

MARGIN EROSION: Significant declines in operating margins or lower MADS coverage could trigger a negative rating action.

ENROLLMENT PRESSURES: Continued enrollment declines could reduce the university's balance sheet strength and financial flexibility and lead to a negative rating action.

CREDIT PROFILE

Suffolk is a private university located in downtown Boston, Massachusetts and serves a diverse mix of undergraduate and graduate students. Originally founded in 1906 as a stand-alone law school, the university's programming expanded to include a college of arts and sciences (CAS) and the Sawyer business school. About 70% of the 7,833 fall 2013 full-time equivalent (FTE) students are undergraduates. Approximately 25% of undergraduate students live on campus. The business school provides both undergraduate and graduate education. The law school has shrunk, but continues to be the largest graduate college at Suffolk. In fall 2013 it enrolled 1,380 FTE students, down from 1,466 in fall 2012, but still about 18% of total university FTE enrollment. Law school enrollment for fall 2014 is expected to decline again, but remain well within budget assumptions.

POSITIVE OPERATING MARGINS

Suffolk consistently produces positive operating margins (including the endowment draw). In the past five fiscal years (2008-2013), surpluses averaged 5.3%. The operating margin for the fiscal year ending June 30, 2013 was 6.3%, stronger than 4.9% in fiscal 2012. University management projects fiscal 2014 operating results will be similar to fiscal 2013 (the audit is not yet available). Fitch views these operating results as impressive given enrollment and expense stresses in recent years.

Net student tuition and fee revenue typically comprises a high 94%-95% of operating revenues. Fitch notes that net student revenue has fluctuated slightly in recent years, with declines in both fiscal 2013 and projected fiscal 2014. This is due to enrollment declines in the sizable law school as well as a large entering class (fall 2008) completing the academic cycle. Net tuition revenue dipped 1.9% in fiscal 2013, which was consistent with Suffolk's projections; Suffolk still increased its overall operating margin by managing expenses.

Fitch views student fee dependence as a continuing challenge for Suffolk, particularly given the highly competitive New England higher education market. However, to date, Suffolk's conservative budgeting strategies have provided sufficient flexibility to manage fluctuations in enrollment and net student revenue. For fiscal 2014, another operating surplus is projected. The fiscal 2015 budget is also balanced on a GAAP basis, with a surplus projected. The university announced some lay-offs in fiscal 2014 (primarily in the law school and IT division) as well as a salary freeze in fiscal 2015.

HIGH DEBT BURDEN BUT ADEQUATE MADS COVERAGE

The university's operating surpluses help offset a MADS burden that Fitch views high at 12.2% of fiscal 2013 revenues. Net income available for debt service in fiscal 2013 provided an adequate 1.6x MADS coverage (MADS occurs in 2039), which somewhat mitigates concern regarding the university's ability to meet its obligations. Current debt service coverage in fiscal 2013 was a stronger 2.0x.

Suffolk's ability to demonstrate debt service coverage from operations is particularly important given its revenue concentration and recent enrollment. The university has no new debt plans at this time; total debt was about $351 million at July 15, 2014. Suffolk cash-defeased $4.5 million of bonds in July 2014 from real estate proceeds, which Fitch considers positively. The defeasance did not change MADS.

BALANCE SHEET CONSISTENT WITH RATING CATEGORY

Available funds, defined by Fitch as cash and investments not permanently restricted, were $196 million at June 30, 2013, and have increased nominally in each fiscal year since at least 2009. This represented 85% of fiscal 2013 operating expenses and 53% of outstanding debt, ratios Fitch considers consistent with the rating category. Based on preliminary information, available funds ratios for fiscal 2014 are expected to be similar to, or slightly stronger than, fiscal 2013. Continued generation of operating surpluses combined with no new debt should allow the university to maintain or grow available funds ratios over time.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria', dated May 2014;

--'Fitch Affirms Suffolk University, (MA) Bonds at 'BBB'; Outlook Stable', dated Sept. 04, 2013.

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=863794

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Contacts

Fitch Ratings
Primary Analyst:
Susan Carlson, +1-312-368-2092
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Colin Walsh, +1-212-908-0767
Director
or
Committee Chairperson:
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com