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| [March 21, 2013] |
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Fitch Rates Florida Gulf Coast University Financing Corp. Housing Project Revs 'A+'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings assigns an 'A+' rating to approximately $30 million of
capital improvement revenue bonds, series 2013 A (housing project)
issued by the Florida Gulf Coast University Financing Corporation (the
corporation) on behalf of Florida Gulf Coast University (FGCU).
The fixed-rate bonds are expected to price via competitive sale on or
about the week of April 2.
At the same time, Fitch affirms various corporation housing, parking and
student fee bond long-term ratings detailed at the end of this press
release.
The Rating Outlook is Stable.
SECURITY
The bonds are a general obligation of the corporation, payable from
lease payments received by the corporation by the housing system under
an amended and restated master operating lease with the university.
Additional security provisions include a segregated debt service
reserve. Lease payments are structured to equal debt service on the
related housing bonds. Additionally, the outstanding parking and student
union bonds are similarly secured by the respective enterprises.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: FGCU's high student demand for auxiliary
services, which generate good debt service coverage, underpins Fitch's
ratings on the housing, parking and student union capital improvement
bonds. These positive attributes somewhat offset FGCU's exposure to
variable rate debt.
SOUND DEMAND: Rapid enrollment growth at the university has fueled use
of auxiliary services, bolstering net revenues.
HEALTHY COVERAGE: Housing, parking and student union-related debt has
historically enjoyed healthy coverage of debt service. Projected
coverage levels for housing are expected to decline, but remain
adequate, as additional debt service comes online. However, these
projections appear conservative.
RATING SENSITIVITIES
INCREASING HOUSING SYSTEM DEBT: Issuance of additional debt in the
absence of demonstrated demand for additional housing may diminish
currently adequate coverage levels and would negatively impact the
rating.
REVERSAL OF MARGIN TREND: The university's operations have weakened in
fiscal 2012. The inability to return to break-even to positive
operations by fiscal 2014, coupled with the further erosion of somewhat
limited financial resources, could pressure the university. The focus on
FGCU's operations is necessary to offset a large depreciation expense
and risks associated with variable rate exposure leading to a potential
call on liquidity.
CREDIT PROFILE
The university is a member of the state university system of Florida and
was founded in 1991, admitting its initial student body in 1997, to
provide undergraduate and graduate level education for the citizens of
Southwest Florida. Located in Fort Myers, Florida, the academic needs of
this growing population have been a catalyst for academic program
expansion and the construction of new facilities. The university
currently offers 49 undergraduate and 30 graduate programs through five
colleges. The headcount enrollment for fall 2012 was 13,448 students.
Housing System
Healthy debt service coverage from net revenues is the primary driver
for the housing system, parking system and student union bonds. Net
revenues from the housing system generated 1.61 times (x) debt service
coverage in fiscal 2012. Due to debt service for recent issues coming
online, debt service is projected to increase 47.5% between fiscal 2012
and fiscal 2015. Despite the significant increase, debt service coverage
is projected to average a satisfactory 1.48x from fiscal 2013 to 2016 as
a result of gains in enrollment, which subsequently drives demand for
on-campus housing.
FGCU's housing system (rated 'A+') has benefited from fall occupancy of
over 99% for the past two academic years, with a strong average academic
year occupancy of 96.9%. For fall 2012, over 50 students were placed on
a wait list for on-campus housing compared to over 200 in fall 2010,
reflecting a modest slowdown in demand for housing as new facilities
come online. The limited off-campus housing opportunities and strong
demand have driven the aggressive building schedule that has
characterized the period from 2007 to the present.
Following the issuance of the bonds, housing system debt will total
$199.1 million, and the portion of housing related variable rate demand
bonds outstanding (VRDB) is reduced to 14.6% in fiscal 2012 from 16.4%
in fiscal 2010, as existing bonds amortize. Fitch views the greater
percentage of fixed-rate bonds favorably. The housing expansion is
required to meet demand driven by the university'srapid enrollment
growth.
Parking System
FGCU's parking system (rated 'A+') is supported by a universally applied
fee of $8.50 per credit hour assessed to all university students, a
notable strength of the security. Debt service coverage for the parking
system was strong at 1.73x for fiscal 2012. Similarly to the housing
system, debt service is set to increase by 27.9% in fiscal 2013 as debt
service from prior issues layers on to the existing obligations. Despite
the upswing, projections indicate adequate average debt service coverage
of 1.44x from fiscal 2013 to fiscal 2016. Parking system debt totals
$22.1 million, of which 58.2% is variable rate. FGCU does not plan to
issue additional parking system capital improvement bonds in the near
term.
Student Union System
Student union bonds (rated 'A') are supported by the net revenues of the
university's book store and food service enterprise. The one-notch
distinction between the housing/parking bonds and the student union
bonds reflects the relatively limited nature of the student union
pledged revenue stream, which would be more immediately impacted by an
increasingly competitive environment or unforeseen variability in
enrollment. However, the lack of additional debt plans and strong debt
service coverage of 5.06x in fiscal 2012 partially mitigates the
somewhat weaker revenue stream.
Budgeted projections for student union debt indicate lower but healthy
average debt service coverage of 2.38x from fiscal 2013 to fiscal 2015,
accounting for the variable rate interest component. The student union's
$5.6 million in outstanding debt is 100% variable rate. The risks
associated with the VRDBs are somewhat offset by the high demand and
strong historical coverage levels, as well as lack of additional planned
student union debt. Further, Fitch views favorably FGCU's conservative
budgeting for all variable rate debt, which includes a 4% interest rate
assumption.
University Operations
At the university, solid annual enrollment growth has averaged 7.1% per
year over the past five years, resulting in a 91.8% increase in net
tuition and fees over the same period. Strong growth in admission
applications, surpassing last year's record high, is expected to
generate 5% enrollment growth over last year to 14,529 students in fall
2013. Growth in student generated revenues has helped offset the
reduction in state appropriations, which declined 18.7% in the past five
fiscal years to $45.9 million. In fiscal 2012, state appropriations
represented 27.4% of operating revenues, down from 43.4% in fiscal 2008,
and are expected to decrease further over time. Fitch views positively
FGCU's ability to successfully increase student generated revenues,
including tuition and fees, and manage operating costs to offset the
state funding reductions without negatively impacting programs. The
university's pricing is somewhat flexible but still requires legislative
approval, with tuition in Florida among the lowest in the nation.
Tuition at FGCU is in the mid-range compared to the other public
institutions in Florida. FGCU's tuition rate increase for fall 2012
(fiscal 2013) was 12%, which is high although somewhat comparable to
increases charged by other public institutions in the state.
Despite these positive enrollment and revenue growth factors, the
university's operating margin has historically fallen short of
break-even, averaging negative 1.5% over the past five years. In
addition, balance sheet resources are somewhat limited, with available
funds (defined by Fitch as cash and investments not permanently
restricted) covering just 32.4% of expenses and 24.4% of total pro forma
debt, notably a modest improvement compared to 21.6% and 13.7%,
respectively, in fiscal 2010.
The university's negative 4.9% margin in fiscal 2012 was driven by a
combination of increased operating costs related to rapid growth, due
mainly to increased compensation and rising costs associated with
employee benefits, and budget pressures at the state level leading to
reduced operational support, compounded by discontinued ARRA funding
from the state. Fitch views the university's inability to generate
surpluses and thereby further strengthen its financial cushion as a
concern which will continue to be monitored by Fitch. Management has
indicated that controlling costs is a priority and FGCU will continue to
budget conservatively and make cost adjustment as necessary.
Due to reduced capital support, the university was unable to fully
offset capital depreciation. This, in addition to changed state
regulations increasing the capitalization charge for tangible personal
property from $1,000 to $5,000, resulted in the university taking a
one-time $6.1 million write-off in net assets in fiscal 2012. The state
capital appropriations expect to be very limited in the near term for
new construction. The university does not budget for depreciation,
therefore, without additional capital support, operations may be further
pressured. However, the university expects funding for deferred
maintenance for existing buildings to support operations will continue
to be funded by the state.
Fitch affirms the corporation's long-term ratings as follows:
--$142.750 million capital improvement revenue bonds (housing project)
at 'A+';
--$9.063 million capital improvement revenue bonds (parking project) at
'A+';
--$5.6 million capital improvement revenue bonds (student union project)
at 'A' (underlying).
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);
--'College and University Rating Criteria' (May 25, 2012);
--'Fitch Rates Florida Gulf Coast University Financing Corporation
Housing Project 'A+'; Outlook Stable (April 26, 2011);
--'Florida Gulf Coast University Financing Corporation' (April 29, 2011).
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
Florida Gulf Coast University Financing Corporation
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=622090
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IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
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