Fitch Affirms Dartmouth College (New Hampshire) Revs at 'AAA'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the long-term rating on the following series of bonds (the bonds) issued by the New Hampshire Health and Education Facilities Authority on behalf of Dartmouth College (Dartmouth, or the college) at 'AAA':
--Approximately $101 million of outstanding variable-rate demand bonds, series 2002;
--Approximately $99.5 million of outstanding variable-rate demand bonds, series 2003;
--Approximately $35.7 million of outstanding Dartmouth Educational Loan Corporation bonds.
The bonds are an unsecured general obligation of the college. The short-term ratings on the series 2002 and series 2003 variable-rate demand bonds are also affirmed at 'F1+'. The Rating Outlook on all bonds is Stable.
The 'AAA' rating is supported by Dartmouth's internationally renowned reputation for academic excellence, reflective of its strong student demand and highly selective admissions criteria; strong, though somewhat weakened, liquidity; diverse revenue base; strong fundraising capabilities; and limited future capital needs. Primary credit concerns include the college's negative operating performance in three of the past five fiscal years; a projected deficit in fiscal 2009; and a significant increase in financial leverage.
Over the past five fiscal years, Dartmouth aggressively invested in academic programs, financial aid, and physical plant assets. As a result of these initiatives, the operating margin declined from 0.1% in fiscal 2004 to negative 5.7% in fiscal 2008. At the same time, long-term debt more than doubled, increasing from $411.2 million in fiscal 2004 to $945.7 as of June 30, 2009 (including the series 2007 and 2009 bonds, not rated by Fitch). Over this period, Dartmouth's negative operating performance was mitigated primarily by the strength of its balance sheet resources. Unlike many of its similarly rated Ivy League counterparts, Dartmouth is less exposed to illiquid, non-marketable asset classes.
In light of the current economic downturn, management has opted to scale back further investments in programs and facilities and is instead focusing on returning Dartmouth's operating performance to a break-even level or better by fiscal 2010. Operating improvement is expected to result from several longer term cost-saving initiatives, including staff reductions, salary freezes, deferred capital plans, and returning to an endowment distribution smoothing formula, without any supplemental distribution as was contemplated in the college's prior financial plan. However, for fiscal 2009, as the college implemented these initiatives, management expects an additional operating deficit equal to or just above the fiscal 2008 level.
To maintain its 'AAA' rating, Fitch expects Dartmouth to sustain its expected turnaround in operating performance beginning in fiscal 2010, while simultaneously maintaining liquidity at or near current levels. A failure to achieve these goals, and/or the college's issuance of additional debt without a commensurate increase in financial resources, would yield rating pressure. At this time, Dartmouth does not have immediate debt plans.
Despite market losses, and approximately 26% of its endowment exposed to illiquid asset classes, Dartmouth maintains strong liquidity. Available funds, defined by Fitch as cash and investments that are not permanently restricted, totaled $3.4 billion for fiscal 2008, and covered operating expenses and pro forma debt by a strong 4.9 times(x) and 3.6x, respectively. As of March 31, 2009, the market value of the college's endowment investments declined approximately 23% to $2.7 billion from $3.6 billion as of June 30, 2008, as a result of the current financial market turbulence. In addition, Dartmouth's outstanding debt increased significantly in fiscal 2009 following the issuance of approximately $409 million of net new debt. As of June 30, 2009, the college had approximately $945.7 million of total debt outstanding. Fitch notes that $250 million of the new debt issued in fiscal 2009 represents a taxable bond issue, the proceeds of which are expected to be used only in the event of a need for emergency funding. The aforementioned debt is interest only, with a bullet payment due at maturity in fiscal 2019.
The short-term 'F1+' rating is based on the availability of highly rated, liquid investments and various liquidity facilities, which provide sufficient coverage for Dartmouth's variable-rate debt obligations. As of June 30, 2009, Dartmouth had approximately $442.2 million of liquid investments available the same day, including cash, money market funds, and U.S. treasury obligations. These funds include the proceeds of the college's $250 million series 2009 taxable bond issue. In addition, Dartmouth has two standby bond purchase agreements (SBPAs) provided by JPMorgan Chase Bank, N.A. in an aggregate amount of $416.3 million, which are dedicated to the college's $410.4 million of outstanding variable-rate demand bonds (VRDBs). The two SBPAs expire in February 2011 and August 2011, respectively. Dartmouth also has a $175 million line of credit provided by Bank of America, N.A. for general liquidity needs and expires in August 2011. In addition to VRDBs, Dartmouth has $7 million currently outstanding under its $75 million taxable commercial paper program (not rated by Fitch).
Founded in 1770, Dartmouth is the ninth oldest college in the U.S. and is one of the eight schools of the 'Ivy League'. Its campus is situated on 265 acres in Hanover, New Hampshire. For fall 2008, the college had 5,684 full-time equivalent students, with a 13.5% acceptance rate and 49.1% matriculation rate. For fall 2009, the college accepted a very low 12% of the 18,131 applications it received.