|[March 20, 2013]
Fitch Downgrades New Mexico State University Revs to 'AA-'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings has assigned its 'AA-' rating to the following bonds
issued by the Regents of New Mexico State University (NMSU):
--$15.62 million improvement revenue bonds, series 2013 A;
--$41.12 million refunding revenue bonds, series 2013 B.
The series 2013 A bond proceeds will fund the renovation of NMSU's
student union, upgrades to the university's golf course irrigation
system and pay costs associated with the issuance of the bonds. The
series 2013 B bond proceeds will be used to refund all or a portion of
outstanding bond issuances and pay costs associated with the issuance of
the bonds. Both series will be sold via negotiation on or about the week
of April 1.
At the same time, Fitch downgrades various long-term ratings on parity
bonds of NMSU as detailed at the end of this press release.
The Rating Outlook is Stable.
Revenue bonds are special obligations of the Regents of NMSU, payable
from gross revenues of the university. State appropriations, ad valorem
taxes, and certain restricted contributions are excluded from the pledge.
KEY RATING DRIVERS
WEAK OPERATIONS: The downgrade to 'AA-' reflects materially weakened
operating results in fiscal 2012 as a result of significant declines in
the university's two primary revenue streams, exacerbating the negative
operating results in restated financial statements driven by the
reclassification of certain capital related expenses to operating from
MODEST DEBT BURDEN: The university's relatively low debt burden is
conservatively structured, with maximum annual debt service (MADS) due
in 2014 and declining annual obligations thereafter.
GROWING BALANCE SHEET CUSHION: NMSU's balance sheet resource base has
grown consistently over the last three fiscal years to provide a limited
but adequate cushion of outstanding debt and operating expenses.
REVERSAL OF MARGIN TREND: An inability to stem operating losses through
anticipated revenue growth beginning in fiscal 2014 could pressure the
credit over the near term.
MAINTENANCE OF UNENCUMBERED RESERVES: Preservation of available funds at
or near current levels is assumed at the current rating level given the
negative but improving operating performance expected over the near to
Founded in 1888, NMSU consists of the main campus in Las Cruces, New
Mexico (with 17,651 headcount students) and four branch community
college campuses (12,117 headcount students). Total enrollment has
declined in each of the last two enrollment cycles, after growing to a
high of 30,866 at all campuses in fall 2010 partially as a result of
weakening demographics in the state. Approximately 72% of NMSU students
are residents of New Mexico.
EXPENSE RECLASSIFICATION REVEALS PRESSURED OPERATIONS
In fiscal 2011, NMSU made an accounting adjustment that classified
certain capital expenses previously considered non-operating as
operation and maintenance expenses. As a result, the fiscal 2011 margin
dipped below break-even to -1.3%. Application since then of the
accounting reclassification to prior years resulted in a materially
different operating history than the break-even to positive levels that
had beenpreviously reported. Following the prior-period adjustments,
the university's average operating margin from fiscal 2009 - fiscal 2011
was -1.1%, which is somewhat below the break-even to positive
expectations set by Fitch's rating criteria.
This weakened position was exacerbated by revenue declines (primarily
grants and state appropriations) in fiscal 2012 that ultimately drove a
-5.3% deficit. Enhanced state appropriation levels, including capital
funding, are expected to bolster fiscal 2013 performance as compared to
fiscal 2012. However, the university is currently projecting a smaller
deficit in fiscal 2013 at slightly greater than the -1.1% generated in
fiscal 2011. Though further improvement is expected in fiscal 2014,
Fitch views the weaker operating trends as the primary driver of the
downgrade to 'AA-'.
REVENUE DRIVERS WILL DETERMINE FUTURE PERFORMANCE
The university's future performance will be heavily influenced by its
primary revenue streams: grant and contract revenues, state
appropriations and student generated revenues. Federal grant and
contract revenue (39.9% of fiscal 2012 revenues), could be pressured by
sequestration. Management indicated that commensurate expense reductions
could be enacted on relatively short notice to absorb the revenue
State appropriations (33.6%) are currently expected to increase in
fiscal 2014, but are subject to final legislative approval. Student
generated revenues (18.5%) are tied to the university's demand profile,
which is currently somewhat unfavorable given the projections for the
state's college-going population. Fitch will continue to monitor the
impact of changes and the university's ability to address any unexpected
shifts without operational balance.
BALANCE SHEET ADEQUATE FOR CURRENT LEVERAGE
NMSU's recent negative operating performance is a heightened concern in
the context of the university's limited balance sheet cushion. Available
funds, or cash and investments not permanently restricted (including
bond proceeds, which Fitch considers to be restricted), totaled just
$115.4 million in fiscal 2012.
This represented a low 20.9% of annual operating expenses ($552.1
million) and a more adequate 78.3% of total pro forma debt ($147.4
million). While the cushion remains low compared to other 'AA' category
institutions, available funds have grown incrementally in each of the
last three fiscal years, which Fitch views positively.
Fitch also views NMSU's relatively low debt burden, with pro forma MADS
of $16.3 million representing just 3.1% of fiscal 2012 operating
revenues, favorably. However, given the manageable nature of the burden,
deficit driven coverage of just 0.6x poses a concern. Improving
operations by fiscal 2014, which the university expects to achieve, will
be key to generating sum-sufficient coverage of the MADS burden.
Negative rating pressure could result if the university is required to
rely on balance sheet reserves to fund MADS in 2014. Debt service costs
begin to decline in fiscal 2015 and do so incrementally through final
maturity in 2033. This structure contributes to near-term reductions in
the already low debt burden, which Fitch considers a positive credit
Fitch downgrades the following long-term ratings to 'AA-' from 'AA':
--$84.11 million tax-exempt refunding and improvement revenue bonds;
--$12.17 million taxable improvement bonds;
--$38.245 million improvement revenue bonds (Taxable Direct Payment
Build America Bonds).
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', dated June 12, 2012;
--'U.S. College and University Rating Criteria', dated May 25, 2012.
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria
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