NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded approximately $216.6 million of outstanding New Jersey Educational Facilities Authority (NJEFA) revenue and revenue refunding bonds issued on behalf of The College of New Jersey issue (TCNJ) to 'AA-' from 'AA'.
The Rating Outlook remains Stable.
The bonds are a general obligation of the college, payable from legally available funds.
KEY RATING DRIVERS
RATING DOWNGRADED: The downgrade to 'AA-' is driven by TCNJ's significant financial leverage supported by slim financial resources and narrowing operating margins. These tighter margins are vulnerable to lower than budgeted enrollment and flat-to-weakening operating support from the state of New Jersey (rated 'A'/Stable Outlook by Fitch).
VERY HIGH DEBT BURDEN: TCNJ's debt burden is high for the rating category, though the college continues to generate sufficient net income available for debt service to cover its annual obligations. This high debt level should moderate over time due to fairly rapid amortization; however, additional debt may be issued in the next two to three years putting pressure on already thin resources available to support repayment.
DEMAND-DRIVEN FINANCIAL FLEXIBILITY: Student-generated revenues are the primary revenue driver. TCNJ's headcount enrollment is generally flattening, while enrollment growth in prior years has served to help offset volatility in state appropriations. TCNJ will need to sustain stable enrollment trends to support operations.
INCREASING LEVERAGE: The College of New Jersey's issuance of additional debt, including the planned fiscal 2018 bond issuance, without a commensurate increase in financial resources available to support repayment, may trigger a negative rating action.
OPERATIONAL STABILITY: The College of New Jersey's rating could be negatively affected by its inability to grow future enrollment and student generated revenues, sufficient to offset decreasing state support, and generate positive operations.
TCNJ, founded in 1855 and located in the suburb of Ewing, New Jersey, is a recognized public institution of higher education in the state. The college's strong liberal arts core forms the foundation for 43 undergraduate degree programs offered throughout the college's seven schools. In fall 2015, TCNJ enrolled 6,589 full-time equivalent (FTE) undergraduate students and 368 FTE graduate students. The college has residential facilities and houses approximately 60% of students.
SLIM FINANCIAL CUSHION DRIVES DOWNGRADE
Available funds (defined by Fitch as cash and investments less non-expendable restricted net assets) provide a reasonable financial cushion relative to operating expenses (51.5%) but are weak relative to long term debt (28.6%) for audited fiscal 2014. Fitch views TCNJ's financial resources relative to debt as more in line with 'AA-' Fitch-rated public institutions. Unaudited fiscal 2015 results are expected to show a slight increase in the available funds level.
Given that TCNJ is close to reaching enrollment capacity, enrollment growth is expected to be more limited; therefore, the resource base is expected to grow only modestly as operating surpluses are expected to remain slimmer.
ADEQUATE OPERATING PERFORMANCE
Operations narrowed following a multi-year trend of strong surpluses. TCNJ generated a breakeven margin in fiscal 2014, though lower than prior years. Fiscal 2015 is expected to be slightly better, based on unaudited estimates provided to Fitch. State base appropriations in fiscal 2015 remained flat.
TCNJ does not budget for depreciation expense, but TCNJ annually funds the asset renewal and replacement fund in the amount of approximately $13 million as a proxy for depreciation. At the current rating level, Fitch expects TCNJ to continue to generate modest surpluses thereby augmenting reserve levels.
The college's demand metrics are stable with generally flat headcount enrollment and consistent admissions and student quality. TCNJ has fairly high selectivity (48.7%), but matriculation is weak (26.4%) compared to the other Fitch-rated NJ public institutions. Enrollment pressure exists with respect to less costly alternative public universities and community colleges and competing private universities.
Maximum annual debt service (MADS) consumes a high 14.6% of fiscal 2014 operating revenues, which does not include non-recourse debt. Fitch does not include any Campus Town debt in its calculation of debt burden given the state legislation prohibiting the college from financing any portion of Campus Town, or being financially obligated.
TCNJ's MADS burden is the highest among public colleges and universities rated by Fitch in the 'AA' category. This high MADS burden remain on the extremely low end of expectations which further support the rating downgrade to 'AA-' at this time. TCNJ's MADS coverage from net income available for debt service is sound at 1.2x in fiscal 2014, counterbalancing some concern.
Further, rapid principal amortization should help moderate this high debt burden over time. However, issuance of additional debt beyond that contemplated in TCNJ's short-term facilities master plan could further impact the rating, if there is not commensurate growth in resources to support the added debt.
Additional information is available at 'www.fitchratings.com'
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. College and University Rating Criteria (pub. 12 May 2014)
Dodd-Frank Rating Information Disclosure Form