|[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.
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
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
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.
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
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
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
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)
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