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TMCNet:  Fitch Rates St. Louis College of Pharmacy, MO, Ser 2013 Rev Bonds 'BBB+; Outlook Stable

[October 30, 2013]

Fitch Rates St. Louis College of Pharmacy, MO, Ser 2013 Rev Bonds 'BBB+; Outlook Stable

CHICAGO --(Business Wire)--

Fitch Ratings assigns a 'BBB+' rating to the approximately $58 million series 2013 educational facilities revenue bonds issued by Health and Educational Facilities Authority of the State of Missouri, on behalf of the St. Louis College of Pharmacy (StLCOP).

The bonds are expected to sell via negotiated sale the week of Nov. 11, 2013. Bond proceeds will fund $50 million of phase I capital projects, including a new six-story academic building with auditorium, library, faculty offices and laboratory space; demolish the existing student center; and fund issuance expenses and capitalized interest. Depending on market conditions, the college may also refund the series 2006 bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the college, issued on parity with the $34.1 million outstanding series 2006 bonds. While the 2006 bonds are outstanding, security provisions include a mortgage and gross revenue lien. Neither issue has or expects to have a debt service reserve fund. When the series 2006 bonds are refunded, the 2013 bonds will be an unsecured general obligation of the institution.

KEY RATING DRIVERS

STABLE OPERATIONS: The 'BBB+' rating is supported by StLCOP's competitive admissions; stable enrollment; conservative budgeting strategies; and history of not using its endowment draw, which to date have provided operating flexibility and supported endowment growth and positive operations. Fitch views StLCOP's narrow academic niche and student revenue concentration as a continuing challenge, particularly given the increase in the number of Pharm.D. programs over the last decade.

HIGH DEBT LEVERAGE: Debt leverage increases significantly with this issue, producing very high proforma MADS burden of 18% of fiscal 2013 operating revenues. This will further increase when projected debt associated with phase II projects is issued in several years. While Fitch considers this burden very high, and a significant limiting credit factor, it is partially mitigated by management's ability to generate positive operating margins.

STUDENT FEE CONCENTRATION: Tuition and fee dependence is consistently over 90% of operating revenues, and only slightly more moderate at around 80% if the endowment draw is included.

NARROW ACADEMIC NICHE AND ENROLLMENT RELIANCE: StLCOP's concentrated academic program exposes it to industry risk, which is partially mitigated by stable enrollment over time, a selective demand profile, and continuing demand for pharmacists.

ADEQUATE PROFORMA MADS COVERAGE: Pro forma MADS coverage for fiscal 2013, including projected debt anticipated to be issued for phase II projects, is positive at about 1.37x when endowment draw is included.

SOLID BALANCE SHEET METRICS: Post issuance liquidity ratios are weakened, but remain strong for the 'BBB' rating category. Those ratios remain adequate for the rating category when including projected phase II debt.

RATING SENSITIVITIES

HIGH DEBT LEVERAGE: Growth in StLCOP's high proforma MADS burden could negatively pressure the rating. No additional debt beyond the planned phase II financing (projected at $30 million) is expected.

MARGIN EROSION: While not anticipated at this time, a marked decline in debt service coverage or operating margins could trigger a negative rating action. To maintain the rating, Fitch expects StLCOP to generate solid operating margins and debt service coverage, consistent with or stonger than projections.

CREDIT PROFILE

StLCOP is a private, non-profit college with a compact campus located in the St. Louis, Mo., medical campus near Washington University School of Medicine, Barnes Jewish Hospital and St. Louis Children's Hospital. It was founded in 1864 as a stand-alone pharmacy school, and principally offers a professional Doctor of Pharmacy (Pharm.D.) degree. Unlike most U.S. pharmacy programs, StLCOP accepts most of its students as freshmen instead of as junior year transfers. Admissions are selective and enrollment is stable - fall 2013 headcount is 1,350, up about 9% since fall 2009.

The series 2013 bond issue and a projected $30 million issuance in calendar 2014 or 2015 supports StLCOP's strategic initiatives. The strategic plan involves several components, including moving from a six-year to a seven-year Pharm.D. program and providing students a BS in health sciences after four years. Construction of new academic and student services buildings are needed to provide capacity. The seven-year program does not require an increase in the number of matriculating students (the fall 2013 entering class was 280, including 29 transfer students); rather, those students remain an additional year in the undergraduate portion of the program. About 20% of students - mainly freshmen and sophomores - presently live on campus. This number is expected to increase after phase II housing and dining facilities are completed in 2-3 years.

POSITIVE FINANCIAL OPERATIONS

STLCOP's credit profile is supported by a history of positive operating margins, although those margins have slimmed in recent years. In the past five fiscal years (2008 - 2013), surpluses averaged 6.2%, although results for 2012 and 2013 were 3.3% and 2.6%, respectively. Fitch views these operating results as understated compared to peer institutions, as StLCOP routinely does not utilize its board-approved 5.5% endowment draw (it periodically budgets for a portion of it, but historically has not used it). If the draw is included in audited operating revenues, the 5-year operating margin exceeds a very healthy 18.0% (about 16.7% for fiscal 2013).

Student generated revenue of about 90% dominates StLCOP's revenue profile, and while not unusual for peer institutions, this results in significant budgetary reliance on stable enrollment. The college has historically demonstrated strength in managing this key revenue stream, as net tuition and fees have consistently increased since at least fiscal year 2007 (they were up 9.2% in fiscal 2013 alone), and growth is projected to continue. Fitch considers projections to be achievable at this time. Endowment, most of which is unrestricted, was $127.6 million at June 30, 2013.

HIGH DEBT LEVERAGE

Post issuance debt is about $93 million, a significant increase from the current $35 million. An additional issuance of about $30 million is expected in 2014 or 2015 to fund the phase II projects (student housing, dining and related facilities), which could increase debt to around $124 million.

The college is in the early stages of a capital campaign, and at this time is not counting future gifts or pledges as a capital funding source. The MADS burden after issuance of just the series 2013 bonds grows to approximately $6.4 million by 2017, a very high debt burden of 18% based on fiscal 2013 operating revenues. After issuance of the planned phase II projects, the MADS burden (approximately $8.3 million) could rise to 24% of operating revenues. While the debt burden is exceedingly high, Fitch believes StLCOPs operating performance and financial flexibility somewhat mitigate this concern.

POSITIVE PROFORMA COVERAGE

Estimated MADS coverage for both phase I and II projects (about $8.3 million), is positive at about 1.37x based on fiscal 2013 financial results. While this calculation includes the endowment draw, it results in slim but positive proforma coverage, which Fitch considers consistent with the rating category.

BALANCE SHEET REMAINS SOLID FOR RATING CATEGORY

Available funds -- defined by Fitch as cash and investments not permanently restricted -- were about $125 million at June 30, 2013. This represented 134% of post issuance debt, and 90% of debt when including the expected phase II issuance. Both of these ratios remain solid for the 'BBB' rating category. AF relative to operating expenses were significantly stronger for the rating category at 353%.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria' (May 2013)

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=806567

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND 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 SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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