NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to the following Laredo Community College District (LCCD) revenue bonds:
--$5.4 million combined fee revenue refunding bonds (CFRB) series 2016.
The bonds are expected to price via negotiation on or about July 13, 2016. Proceeds will be used to refund outstanding series 2006 bonds. The series 2016 bonds are expected to sell with bond insurance.
In addition, Fitch has affirmed the rating on LCCD's approximately $60.2 million parity CFRB bonds at 'A+'.
The Rating Outlook has been revised to Stable from Negative.
The CFRB bonds are secured by and payable from a pledge of certain student fees, up to 25% of gross tuition revenues, and interest earnings thereon.
KEY RATING DRIVERS
GENERALLY POSITIVE OPERATIONS: The Stable Outlook reflects LCCD's track record of generally positive GAAP operating margins and ability to manage effectively through revenue and enrollment cycles. Fitch expects the district will continue to use its operating tax rate flexibility. LCCD's revenue diversity and expenditure flexibility should support continued operating balance.
MIXED ENROLLMENT TRENDS: LCCD's enrollment has improved more slowly than that of other Texas peers in response to energy-related economic softening, which can drive countercyclical enrollment growth. Following a period of marked enrollment declines, the district's headcount improved modestly starting in fall 2015. However, FTE enrollment and semester credit hours continue to decline, although the pace of decline is slowing.
HIGH DEBT LEVELS: The district has a high debt load including a sizeable recent general obligation (GO) issuance to fund a large capital plan. Available funds relative to total debt was quite weak at 11.9% in fiscal 2015. Carrying costs are also high relative to peers, with current debt service equal to 18.1% of operating revenues. However, a majority of the district's debt is supported by direct property tax levies, and tax-supported carrying costs are moderate relative to the district's tax base.
LIMITED PLEDGE: The CFRBs have a relatively narrow pledge of student tuition and fees that constrains the rating. Pledged coverage from gross revenues is sound. Due to the gross nature of the pledge, however, Fitch emphasizes the district's overall ability to meet its obligations from all available operating revenues.
BALANCED OPERATIONS: Rating stability assumes that Laredo Community College District (LCCD) will continue to generate balanced operations and adequate coverage of all debt obligations over time despite somewhat volatile and economically countercyclical enrollment trends.
ADDITIONAL DEBT: LCCD currently has no plans for additional debt, and Fitch believes there is no additional debt capacity at this rating level.
Founded in 1946, LCCD offers associate degree and vocational programs principally from two campuses in Webb County. Its taxing boundaries are coterminous with the growing city of Laredo, Texas (limited tax bonds rated 'AA'/Stable Outlook). The city of Laredo is a regional service center and serves as the principal port of entry into Mexico and is the largest inland port in the U.S. City population continues to grow rapidly, with an estimated 2015 population of 275,500 that reflects an average annual increase of nearly 3% since the 2000 census.
A new president, Dr. Ricardo Solis, was appointed to replace the retiring president and will begin on Aug. 1, 2016. He comes from a college in the Maricopa County Community College District, AZ and has held administrative positions in several other Texas community colleges. In addition, separate administrative issues that had been credit concerns appear to have been resolved without material negative effects.
GENERALLY POSITIVE OPERATIONS
LCCD has a track record of generally positive GAAP operating margins, with surpluses in four of the past five years despite enrollment volatility and state funding pressure. The district has revenue diversity and expenditure flexibility that should support continued operating balance. Major revenue sources, not all of which are pledged to CFRB bonds, include ad valorem property taxes (37.5%, including the levy for operations and a dedicated levy for LTGO debt service), grants and contracts (30.8%), state appropriations (16.5%), and net student fees (12%).
LCCD generated a positive operating margin of 4.6% in fiscal 2015, similar to the prior year. In recent years, the district has relied more heavily on property tax revenue to offset volatility in enrollment-related revenues and some pressure on state funding. The district has authority to set its own tuition, although its mission and the region's below-average wealth and income levels effectively constrain tuition increases. The district's taxing capacity has good headroom under the $0.40/$100 taxable assessed value (TAV) rate limit for operations; current rates are about $0.25. The district has demonstrated its willingness to raise both property tax rates and student fees as needed to maintain budgetary balance.
The district's tax base (TAV of $11.8 billion in fiscal 2016) remains sound despite low oil prices and reduced activity in the nearby Eagle Ford shale formation. The district's taxing boundaries are coterminous with the city of Laredo, which has a diversified and still-growing economy anchored in international trade with Mexico and its role as a regional service center. Fitch expects the district will continue to use its operating tax rate flexibility to maintain budgetary balance given recent volatility in enrollment and related revenue streams.
MIXED ENROLLMENT TRENDS
LCCD's enrollment is improving more slowly than that of its Texas peers in response to nearby energy-related economic softening, which typically drives countercyclical enrollment growth at community colleges. The district's FTE enrollment fell by a significant 20.4% between fall 2011 and fall 2015, as economic growth post-recession drew more potential students into the workforce. However, the pace of FTE decline appears to be slowing. Fitch views the district's headcount as a less informative enrollment measure, but notes that headcount bottomed out and increased by about 5% in fall 2015 to 8,749 (5,862 FTE).
Management anticipates overall stabilization and continued headcount growth going forward, as participation in the district's relatively new oil and gas training programs is holding generally steady, and expansion of high-school dual-enrollment programs with Laredo ISD and United ISD may boost contact hours. For fall 2016, LCCD anticipates another 5% headcount increase, but modest FTE declines.
ADEQUATE DEBT SERVICE COVERAGE
LCCD has managed enrollment-related revenue pressures to maintain adequate debt service coverage for the CFRBs; increases in tuition and certain fees have kept pledged (gross) revenues generally steady despite enrollment volatility. As a result, pledged coverage has remained over 2x in each of the past five years. Due to the gross nature of the pledge, however, Fitch emphasizes the district's overall ability to meet its obligations from all available operating revenues.
TAV gains have also helped the district maintain operating balance and adequate overall debt service coverage. Overall coverage of maximum annual debt service (MADS) for all debt obligations from fiscal 2015 operations was more modest at 1.1x. Fitch considers this adequate given that over 70% of the district's debt is supported by a dedicated levy.
LIMITED FINANCIAL CUSHION
The district's balance sheet provides less financial cushion to absorb revenue pressures compared with other community college districts rated by Fitch. Fiscal 2015 available funds (defined as cash and investments less restricted net assets) held steady at $28.8 million but equaled just 33.3% and 11.9% of operating expenses and total long-term debt, respectively. LCCD's cash position, as reported on the balance sheet, includes unspent bond proceeds that Fitch excludes from the available funds calculation.
HIGH DEBT LEVELS
Outstanding debt at Aug. 31, 2015 was $223 million, including $60 million CFRBs, $123 million LTGO bonds, and $39 million maintenance tax notes. LCCD's very high pro forma MADS burden (21.4% for all debt types) results mainly from recent borrowing to fund a large capital improvement plan (CIP). The district is moving into the final phase of its $213 million CIP, with all associated debt issued. The plan is expected to cover major capital needs over at least the next five years and was expanded to include additional modernization projects and the Oil & Gas Institute facility.
Tax-supported debt represents about three quarters of annual debt service and is separately secured by an ad valorem tax levied on all taxable property within the district. The CFRBs have level debt service, with approximately $4.7 million due annually. MADS debt burden for just the CFRBs is more moderate at around 5.2% of fiscal 2015 revenues.
No additional debt of any type is planned, as LCCD expects the current CIP to meet its campus needs over the next 5-10 years. Fitch considers the district to have no additional debt capacity at the current rating.
For more information see Fitch's press release, 'Fitch Rates Laredo Community College District, Texas' Series 2015 LTGO Rfdg 'AA-'; Outlook Stable,' dated June 4, 2015, available at www.fitchratings.com.
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