|[April 22, 2014]
Fitch Affirms Dartmouth College's (New Hampshire) Revs at 'AAA'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed the long-term 'AAA' rating on the following
series of bonds issued by the New Hampshire Health and Education
Facilities Authority on behalf of Dartmouth College (Dartmouth, or the
--$101 million variable-rate demand bonds, series 2002;
--$83.7 million variable-rate demand bonds, series 2003.
The series 2002 variable-rate demand bonds (VRDBs) are supported by a
standby bond purchase agreement provided by JPMorgan Chase Bank, N.A.
(rated 'F1' by Fitch). Fitch does not maintain a short-term rating on
Dartmouth's series 2003 VRDBs.
The Rating Outlook is Stable.
Revenue bonds are an unsecured general obligation of the college.
KEY RATING DRIVERS
PREMIER REPUTATION: Dartmouth's prestigious reputation for academic
excellence, demonstrated by strong student demand, highly selective
admissions criteria, and modestly growing enrollment underpin its 'AAA'
FINANCIAL FLEXIBILITY: A significant level of balance sheet resources;
healthy fundraising ability; and a diverse revenue base, further support
the rating and provide the college with a healthy financial cushion.
OPERATING MARGIN WEAKENS: Management's timely implementation of various
budgetary initiatives following the financial crisis enabled Dartmouth
to generate a positive operating margin in fiscal years 2010 - 2012,
although the margin reverted to breakeven in fiscal 2013 due largely to
HIGH, BUT MANAGEABLE DEBT BURDEN: Dartmouth's pro forma debt burden is
elevated for the rating level, even when adjusting for bullet
maturities. Estimated average annual debt service results in a
moderately high debt burden, although coverage from net operating income
remains sound at over 1.2x.
OPERATING PERFORMANCE: An inability to stabilize operations and restore
a positive operating margin over the near-term, inclusive of endowment
spending, could pressure the rating and or Outlook.
BALANCE SHEET PRESERVATION: While not expected, a material decline in
financial resources could pressure operating performance given
Dartmouth's slim operating margin and somewhat elevated leverage metrics.
Founded in 1769, Dartmouth is the ninth oldest college in the U.S. and
one of the eight schools of the 'Ivy League'. Its campus is situated on
265 acres in Hanover, NH. It offers about 1,400 undergraduate courses,
as well as several masters and doctoral programs through its prestigious
graduate schools, primarily the Geisel School of Medicine, Tuck School
of Business and Thayer School of Engineering.
Dartmouth's prestigious reputation is the basis for its strong demand
characteristics. Fall 2013 freshmen acceptance rate was a selective
10.4%, with a solid 48% of accepted students choosing to enroll. Fall
2013 full-time equivalent enrollment totaled 6,185 undergraduate and
graduate students, an increase of 5.8% since fall 2009. While student
demand remains strong, freshmen applications to the college declined
over the past two fall enrollment cycles (2013 - 2014).
The concern over the two-year decline in applications is largely offset
by Dartmouth's growing enrollment and highly selective admissions, which
provide it with significant flexibility. Management has also
historically met its target freshmen class size of about 1,100 each
year, a trend Fitch expects will continue. Fitch will continue to
monitor application volume and assess what, if any, impact a potential
prolonged decline, however unlikely, could have on Dartmouth's
SIGNIFICANT RESOURCE BASE PROVIDES FLEXIBILITY
Dartmouth's significant level of balance sheet resources provides it a
strong financial cushion. Available funds, or cash and investments not
permanently restricted, totaled $3.91 billion as of June 30, 2013, up 7%
as of June 30, 2012, and up 42% since fiscal-year-end 2009. Available
funds covered fiscal 2013 operating expenses ($835.3 million) and
outstanding debt ($1.13 billion) by a strong 4.7x and 3.5x,
respectively. Lie many private institutions with similar size
endowments, Dartmouth maintains considerable exposure to alternative
investments such as private equity and hedge funds. However, even when
excluding these assets from available funds, Dartmouth's financial
cushion remains solid.
Dartmouth's diverse stream of revenues adds to its financial
flexibility. The college's largest revenue source is student-generated
tuition, fees and auxiliary receipts, which accounted for 29.5% of
unrestricted operating revenues in fiscal 2013. Grants and contracts,
and investment income (including the endowment distribution) represented
the second and third largest funding sources at 22% each.
In addition, consistent funding is derived from unrestricted gifts and
clinical service revenue. Dartmouth's healthy fundraising ability was
further evidenced by the recent receipt of a $100 million gift to
support academics; the largest single gift in the college's history.
Clinical service revenue reflects reimbursements to the college for
activities performed by faculty of Dartmouth's Geisel School of Medicine
at the Dartmouth-Hitchcock Medical Center (DHMC, revenue bonds rated
'A+' by Fitch). While DHMC is separately incorporated, its hospitals and
clinics are closely affiliated with Dartmouth and serve as the main
teaching site for the medical school.
EXPENDITURE GROWTH TRIMS OPERATING IMPROVEMENT
Following operating improvement as a result of several prudent measures
taken by management, including tuition and fee increases and various
expense reductions, Dartmouth generated positive GAAP-based operating
margins of between 1.6% and 2.2% in fiscal years 2010 - 2012 (including
endowment spending). However, operating performance weakened in fiscal
2013, with the margin falling to negative 0.3%, or roughly breakeven.
Management attributes the decline in performance partly to a rebound in
certain expense items that had been curtailed over the past few years,
including investment in certain programs and faculty. On a GAAP basis,
management anticipates another deficit for fiscal 2014.
Dartmouth's recent financial improvements were achieved concurrent with
a reduced endowment distribution. After it reached a high of 7.2% in
fiscal 2010, management gradually reduced its endowment distribution,
which was viewed favorably by Fitch. The endowment distribution was 5.3%
in fiscal 2013 for a total of $186 million, and is expected to have
declined to 5% in fiscal 2014, remaining at the level going forward.
Fitch believes sustaining the lower payout rate is realistic given the
college's improved balance sheet resources. However, should operating
performance remain at or below breakeven, a higher reliance on the
endowment could ensue. The stable rating outlook assumes Dartmouth will
maintain balance sheet liquidity at or above current levels.
HIGH, BUT MANAGEABLE DEBT BURDEN
Similar to many highly rated institutions, Dartmouth utilizes bullet
maturities for certain debt issues. Consequently, the debt burden based
upon maximum annual debt service (MADS; about $313 million in fiscal
2019) as a percentage of fiscal 2013 revenues is a very high 37.6%. MADS
includes a $250 million principal payment related to Dartmouth's 2009
taxable debt (not rated by Fitch) issued solely for liquidity purposes,
and which it intends to pay off at maturity.
When adjusting for the various bullet maturities, Dartmouth's average
annual debt service (AADS) is more manageable at about $65 million and
would consume a moderately high 7.8% of fiscal 2013 revenues. Moreover,
net income available for debt service of $79.6 million (including
endowment distributed for operations) provided sound 1.2x coverage.
Concern regarding a debt burden of this magnitude is partially offset by
Dartmouth's strong financial flexibility and market access. Fitch views
Dartmouth's exposure to variable-rate debt (36% of total debt) and
related interest rate hedges as manageable for the college; debt
portfolio liquidity needs and counterparty exposure are carefully
monitored by the college.
Dartmouth's capital needs remain manageable. The 2014 capital budget was
$139 million, with a fiscal 2015 capital budget proposal of $54 million.
The largest project currently underway is a new research building
located at DHMC's campus in Lebanon, NH. The $116.5 million project
commenced in May 2013 and is expected to be completed by Sept. 2015. It
is being funded by gifts, reserves, equity from DHMC, and a portion of
the proceeds of Dartmouth's series 2012 taxable bonds (not rated by
There is no additional long-term debt planned at this time, although
Dartmouth may bridge finance some project costs with commercial paper
until pledged gifts are received. The taxable series 2012 bonds are
expected to cover the capital budget over the near-term, with board
approval required to draw upon the proceeds. To maintain its 'AAA'
rating Fitch expects Dartmouth to manage any increase in financial
leverage without materially weakening operating performance and/or its
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 10, 2013);
--'Fitch Affirms Dartmouth College's (New Hampshire) Revs at 'AAA';
Outlook Stable' (May 1, 2012).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
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