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| [December 17, 2012] |
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Fitch Upgrades Embry-Riddle Aeronautical Univ, FL Revs to 'A-'; Outlook Revised to Stable
NEW YORK --(Business Wire)--
Fitch Ratings has upgraded the rating, to 'A-' from 'BBB+', on
approximately $164.6 million Volusia County Educational Facilities
Authority, FL (VCEFA) revenue and refunding bonds (Embry-Riddle
Aeronautical University (ERAU), Inc. project).
The Rating Outlook is revised to Stable from Positive.
SECURITY
The bonds are secured by a gross revenue pledge of ERAU. As additional
security, the university has granted a mortgage lien on its Daytona
Beach campus.
KEY RATING DRIVERS
OVERALL STRENGTHENING MERITS UPGRADE: The upgrade to 'A-' reflects a
history of positive operations, supported by stable enrollment, low debt
burden and growing balance sheet resources. The aforementioned
attributes are offset in part by a high reliance on student derived
revenues.
FUNDAMENTAL DEMAND STRENGTH: The university's international reputation
within aeronautical and aerospace engineering underpins stable to
growing enrollment trends.
PRUDENT FINANCIAL MANAGEMENT: ERAU's timely and consistent management of
operating fluctuations has enabled ongoing generation of operating
surpluses that provide strong pro forma debt service coverage and
support liquidity growth.
MANAGEABLE CAPITAL SPENDING PLANS: The university will continue to
utilize a portion of its internal resources, which it has significantly
increased over the past few years, to fund capital projects. Based on
projected cash flows, Fitch expects ERAU's balance sheet liquidity will
remain relatively stable given the university's strong performance
trends and lack of additional debt plans.
CREDIT PROFILE
The upgrade to 'A-' from 'BBB+' is indicative of consistently positive
operating performance, which has increased the university's overall
financial flexibility. Over the last five years, ERAU's operating margin
has averaged 5.7%, never dropping below 2.6%. The sustained track record
of positive operations with surpluses that supplement balance sheet
resources and the stable to growing headcount is consistent with Fitch's
expectation for an 'A' category private university.
Further, ERAU's operating health has helped bolster its financial
resource base to a level consistent with the rating. Available funds
(defined by Fitch as cash and investments not permanently restricted)
grew 80% from fiscal 2008 - fiscal 2012, reaching a record high in
fiscal 2012 ($184.1 million). While available funds provides adequate
coverage (62%) of fiscal 2012 operating expenses ($296.8 million), which
is consistent with Fitch's expectation for a 'BBB' rated private
institution, relative to leverage, available funds is a solid 112.7% of
total outstanding debt and more reflective of an 'A' rated private
institution.
ERAU's moderately low debt burden of 3.7% with no additional deb plans,
and strong coverage of pro-forma debt service from net available income
of 4.4x is viewed positively.
Fitch anticipates continued surpluses will be offset by the use of
reserves to fund capital projects. ERAU's five year-capital improvement
plan includes approximately $60 million for current major facilities
projects, of which $38 million will be used to build a new arts and
science building, and approximately $97 million for projects pending
approval, including a new student union.
ERAU's internal cash flow projections reflect a decrease in year-end
cash balances of $15.2 million and $7.9 million in fiscal years 2013 and
2014, respectively; however, available funds is not expected to be
significantly impacted. Fitch will continue to monitor ERAU's ability to
maintain relatively consistent available funds to support stabilization
in liquidity ratios.
ERAU relies heavily on student-generated revenues with enrollment growth
in recent years fueling financial gains. Despite flat FTE enrollment
growth in fall 2012, between fall 2008 - 2012 total FTE's increased 6.8%
(to 16,671, a new record high) largely due to significant FTE growth
(10%) at the Worldwide campus (WWC).
WWC's students are largely military/veteran and WWC's growth is
attributed to improved program accessibility, targeting working adults
and military personnel in varied locations. Federal funding budget cuts
for education stipends continue to provide some concern but are offset
by ERAU's demonstrated ability to adjust expenses in line with reduced
enrollment and maintain positive margin.
Further, Fitch views enrollment growth projections as aggressive but
achievable given ERAU's comparatively low cost and niche reputation.
ERAU's tuition and fees are the lowest in their peer group and ERAU's
Board only adopted a 2% increase in fall 2012, a level it plans to
maintain in fiscal years 2013 - 2017. Fitch anticipates flat enrollment
in fall 2012 will be offset by modest tuition increases enabling
student-generated revenue growth and continued surpluses for fiscal 2013.
Overall, Fitch views ERAU's demand flexibility as relatively sound.
Despite the university's high undergraduate acceptance rates, generally
more reflective of lower rated institutions, the moderately high
matriculation rate and low tuition discounting rate, provide some
revenue flexibility and are more in line with the 'A-' rating. Fitch
views ERAU's unique niche and advanced job placement will continue to
drive demand and minimize student enrollment volatility.
ERAU was established in 1926 as an independent, non-profit,
co-educational university. It is the world's oldest and largest
university specializing in aviation and aerospace engineering and is
accredited by the Southern Association of Colleges.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria' (June 12, 2012);
--'U.S. College and University Rating Criteria' (May 25, 2012)
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=681015
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=679152
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DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
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