Fitch Rates Albany College of Pharmacy and Health Sciences (NY) Revs 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a rating of 'A-' to approximately $16.5 million of tax-exempt revenue refunding bonds series 2014A issued by the City of Albany Capital Resource Corporation on behalf of Albany College of Pharmacy and Health Sciences (ACPHS or the college).

The bonds are expected to sell the week of Sept. 29, 2014. Proceeds of the series 2014A and the unrated 2014B bonds will be used to refund all of the college's outstanding debt, including the Fitch-rated series 2004A, and to pay costs of issuance.

At the same time, Fitch affirms the rating of 'A-' on $11.7 million of civic facility revenue bonds series 2004A issued by the City of Albany Industrial Development Agency on behalf of the college.

The Rating Outlook is Stable.

SECURITY

The series 2014A bonds are secured by a first lien on pledged revenues consisting of gross tuition and fees, excluding auxiliary revenues, as well as a mortgage lien and security interest in the college's main academic and administrative building. The claim on pledged revenues will be on parity with the unrated series 2014B bonds, which will be issued concurrently and purchased by a bank. The bonds will not include a debt service reserve fund.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'A-' reflects the college's positive operating performance and solid financial cushion, supported by prudent financial management and a favorable demand profile. Offsetting factors include the college's high tuition dependence and regional student draw.

NICHE PROGRAMS SUPPORT STRONG MARGINS: Fitch expects continued positive operating margins and strong coverage driven by stable demand for ACHPS' pharmacy and health-related programs, along with prudent financial management. The possibility of modest margin compression in coming years is not a credit concern due to strong coverage and operating flexibility.

BALANCE SHEET AFFORDS FINANCIAL FLEXIBILITY: The college's balance sheet resources continue to grow due to strong margins and investment earnings, providing ample flexibility and cushion against unforeseen variances in operations.

MANAGEABLE DEBT PROFILE: ACPHS' debt burden remains moderate, with no plans for debt-supported projects in the near term. The refunding transaction will reduce the college's variable rate exposure, making interest costs more stable, and will eliminate risks associated with variable-rate demand bonds (VRDBs). Fitch views these changes positively.

RATING SENSITIVITIES

MARGIN EROSION: The college is highly reliant on student revenues, which can be subject to fluctuations based on regional competition and demand for specific programs. Resulting margin erosion that substantially weakened coverage would negatively pressure the rating.

ADDITIONAL DEBT ISSUANCE: While not currently expected, additional debt, in amounts that materially affect the college's financial profile, could pressure the rating.

CREDIT PROFILE

ACPHS was founded in 1881 and is the oldest pharmacy school in New York State. The college offers six undergraduate programs and five graduate programs in health sciences, as well as a doctor of pharmacy degree (Pharm.D.). The Pharm.D. program is offered on the main campus in Albany and on the Colchester campus, the only pharmacy school in Vermont. The college is accredited by the Middle States Commission on Higher Education, which extended its accreditation in 2010 for another 10-year term. The Pharm.D. program is separately accredited by the Accreditation Council for Pharmaceutical Education, which extended its accreditation in 2011 for a six-year term.

NICHE PROGRAMS SUPPORT STABLE DEMAND

A focus on pharmacy and health sciences programs, which Fitch notes are regionally and nationally in demand, drives the college's stable demand profile. ACPHS has consistently generated strong application volumes and stable incoming student yields despite its primarily regional draw and increasing competition. FTE enrollment grew 2.4% annually on average from 1,536 in fall 2008 to 1,690 in fall 2012. Enrollment dipped slightly in fall 2013 and (preliminary) fall 2014 but remains in line with budget expectations and is expected to improve somewhat in fall 2015.

Importantly, strong freshmen-to-sophomore retention rates have contributed to enrollment stability. The college's well-managed enrollment base, despite growing regional competition, partially offsets concerns related to its high reliance on student-generated revenues (87.8% of fiscal 2013 operating revenues). While the tuition discount rate has increased slightly in recent years, Fitch notes that it remains low (15.6% in fiscal 2013) and manageable.

STRONG MARGINS SUPPORT BALANCE SHEET

ACPHS has consistently generated robust operating margins through prudent financial management and favorable student demand. The operating margin was a strong 7.8% in fiscal 2013 but was below the prior five-year average margin of 14.1%. Unaudited fiscal 2014 results show a slightly smaller but still soundly positive margin. The college expects moderate margin compression through fiscal 2015, owing largely to competitive pressures, but expects to continue to generate soundly positive margins. Smaller positive margins are still consistent with the rating category, especially considering the college's balance sheet, which has improved significantly in recent years, and strong budgetary controls.

Strategic reinvestment of operating surpluses over the past five fiscal years has dramatically increased the college's available funds (AF), defined by Fitch as cash and investments not permanently restricted. As of June 30, 2013, available funds totaled $46.3 million, representing a solid 99.2% of fiscal 2013 unrestricted operating expenses ($46.7 million) and a stronger 153.8% of pro forma long-term debt ($30.1 million post-issuance, inclusive of non-cancellable operating leases). AF has improved further as of June 30, 2014 (unaudited) based on another cash surplus and good investment returns. Fitch views positively the college's practice of setting aside operating surpluses for quasi-endowment and capital investment.

MODERATE DEBT BURDEN

The refunding transaction does not materially change outstanding debt or debt amortization. Strong operating performance drove high pro forma MADS coverage of 4.3x in fiscal 2013, with slightly lower but still strong coverage in fiscal 2014 (unaudited). MADS of $2.4 million occurs in fiscal year 2029. The college's debt burden is moderate, as pro forma MADS accounted for 4.7% of fiscal 2013 unrestricted operating revenues.

In addition to the fixed-rate 2014A bonds, the refunding transaction will include the unrated, variable-rate series 2014B bonds, which will be purchased by NBT Bank, N.A. for a term of 10 years under a bond purchase agreement. The series 2014A bonds, issued under a new indenture, and the series 2014B bonds are on parity and include cross-default provisions. Fitch has reviewed the related transaction documents and does not believe the terms of the bank agreements pose additional risk to bondholders.

Fitch views positively that the transaction will reduce the college's exposure to variable-rate debt and eliminate near-term liquidity and renewal risks related to prior VRDB/LOC structures. Expiration of the remaining interest rate swap in December 2014 will also eliminate counterparty risk. Put risk remains for the series 2014B bonds at the end of the 10-year term. Fitch considers this risk to be largely mitigated by ACPHS' strong liquidity position and management's demonstrated prudence in overseeing its debt portfolio. The college has no near-term additional debt plans at this time.

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

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria' (May 12, 2014);

--'Fitch Affirms Albany College of Pharmacy and Health Sciences, (NY) 'A-'; Outlook Stable' (March 18, 2014).

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=873914

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Contacts

Fitch Ratings
Primary Analyst
Tipper Austin
Analyst
+1 212-908-9199
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Alexander Vaisman
Associate Director
+1 212-908-0721
or
Committee Chairperson
Charles Giordano
Senior Director
+1 212-908-0607
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Tipper Austin
Analyst
+1 212-908-9199
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Alexander Vaisman
Associate Director
+1 212-908-0721
or
Committee Chairperson
Charles Giordano
Senior Director
+1 212-908-0607
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com