|[January 08, 2013]
Fitch Affirms Univ of Redlands, CA's Revs at 'BBB'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings affirms the 'BBB' rating on $72.3 million California
Educational Facilities Authority revenue bonds issued on behalf of
University of Redlands (UR).
The Rating Outlook is Stable.
The bonds are an unsecured general obligation of UR.
KEY RATING DRIVERS
RATING AFFIRMED: The 'BBB' rating reflects the university's generally
growing enrollment levels and modest balance sheet cushion offset by
operating margins that reversed course in the past fiscal cycle.
INCONSISTENT OPERATING RESULTS: UR generated weaker than forecasted
operating margins for fiscal 2012 due to shortfalls in certain programs
and expenses outpacing revenue growth. Fitch expects active management
of expenses in the current year to improve margins going forward.
FINANCIAL STABILIZATION PLAN EXTENDED: UR revised its four year
strategic financial plan to five years due to weaker than expected
operations in fiscal 2012 and general economic stress. Fitch notes
recovery, culminating in balanced operations, is predicated upon the
university's ability to align enrollment growth with associated expenses.
ENROLLMENT GROWTH EXPECTED TO BOLSTER OPERATIONS: Enrollment has grown
to the highest level in a decade as new programs have been added. Fitch
expects that a continued positive demand trend will lead to improvement
in UR's operating margin post fiscal 2013.
WHAT COULD TRIGGER A RATING ACTION
INABILITY TO ALIGN DEMAND AND OPERATIONS: UR's continued inability to
utilize growing enrollment to demonstrably improve operating results
will pressure the current rating.
In fiscal 2012, UR's operating margin, negative 4.8%, reversed the
improvement reflected in the two previous years. Fiscal 2012 results
were weaker due to lower than anticipated revenues from two programs
lines (business and education) and an increase in personnel related
expenditures. The university's long standing structural mismatch of
revenues and expenditures has generated a negative operating margin for
eight of the last 10 years. The rating will be pressured if the margin
continues to deteriorate. Despite the aforementioned, the university
continues to generate a cash-basis surplus. In fiscal 2012 net income
available from operations provided adequate coverage of 1.5 times (x)
average annual debt service (AADS). AADS coverage and the moderate debt
burden (4.9%) are in line with other private colleges and universities
rated in the 'BBB' category by Fitch.
UR's management team is committed to a five year strategic financial
plan that is expected to achieve break even to increasingly positive
cash basis margins by fiscal 2014. Fitch expects improvement in GAAP
based margins during the same time frame. The plan includes expense
reduction and enrollment targets which have generally improved since
implementation in fiscal 2010. Fitch notes consistent enrollment growth
measured by full time equivalent (FTE) increases of 5% and 6.5% for
fiscal 2011 and 2012 respectively, has failed to generate a material
improvement in operations. The university must demonstrate the ability
to align growth in enrollment along with financial resources by
generating discernible improvement in margins going forward.
Demand for UR has improved over time. Considering UR's heavy reliance
(90.3%) on student generated revenues, enrollment management is key to
the university's financial success. Enrollment levels measured both by
FTE (4,190) and headcount (4,956) are at a 10-year high. Demand for the
college of arts and sciences (CAS) is growing, however, applications
have declined for the school of business (business) and school of
education (education). Business is instituting scholarship programs to
induce demand and expanding their recruitment to direct mail for inquiry
generation. Education continues to suffer from pressured school district
funding dampening job opportunities in the teaching profession. However,
two new academic offerings have experienced significant demand and
expanding classes in those disciplines is expected to increase student
The new school of continuing studies (SCS (News - Alert)), launched in spring 2011 is
expected to increase revenues for its non-degree granting programs. In
addition to certificate and continuing education programs, SCS will,
this summer, offer core requirement arts and science classes to attract
students from larger public and community college institutions. UR
expects growth in revenues from these classes to impact the fiscal 2014
operations. Fitch notes that management has adjusted its budgetary
expectations for fiscal 2013 based on fall 2012 enrollment and expects
an improvement in the margin.
Liquidity remains stable. Fiscal 2012 available funds (unrestricted cash
and investments) declined slightly (from $40.3 million in 2011) to $38.6
million, still providing moderate coverage of operating expenses (34.5%)
and total debt (44.8%). These levels are within the range of the other
'BBB' category private colleges and universities, however marked decline
of this metric could cause rating pressure.
UR has roughly $86.2 million in aggregate debt outstanding of which
$72.3 million is bonded debt and $7.9 million is bank debt on parity
with the bonds. The university refinanced outstanding bank debt of $5.2
million in fiscal 2012 and incurred new debt for a construction project
in the amount of $2.5 million in fiscal 2013. Associated maximum annual
debt service (MADS) comprises 11.3% of unrestricted operating revenues,
which while slightly high, is acceptable for the rating category. While
the university has multiple foregoing capital investment needs, UR
expects to fund them internally or from gifts and contributions. Fitch
expects any future debt incurrence to be accompanied with a level of
resources sufficient for its repayment.
Originally founded in 1907 by members of the American Baptist Church, UR
is a non-sectarian private university. In addition to its main campus in
Redlands, California, the university also maintains seven satellite
locations used by the school of business, the school of education, and
the new school of continuing studies.
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 24, 2012;
--Fitch Affirms Univ of Redlands, CA's (News - Alert) Revs at 'BBB'; Outlook Stable',
Jan 20, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria
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