|[May 07, 2014]
Fitch Rates Coastal Carolina University (SC) Higher Ed Revs 'A+'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings assigns an 'A+' rating to approximately $36.6 million of
higher education revenue bonds, series 2014 issued by Coastal Carolina
University (CCU, or the university).
The fixed-rate bonds are expected to sell competitively on or around May
21. Bond proceeds will be used to fund construction of the second phase
of an on-campus student housing facility (the project), fund capitalized
interest, and pay costs of issuance. At the same time, Fitch affirms the
'A+' rating on CCU's approximately $54.7 million of outstanding higher
education revenue bonds, series 2013.
The Rating Outlook is Stable.
The bonds, which rank on parity with CCU's outstanding revenue bonds,
are a special limited obligation of CCU, payable solely from and secured
by a pledge of net revenues. Pledged revenues include all revenues of
the university except revenues derived from appropriations received from
the general assembly of the state and institution tuition moneys
collected to pay debt service on state institution bonds (rated 'AAA' by
Fitch Ratings) issued on behalf of the university.
KEY RATING DRIVERS
POSITIVE OPERATIONS: CCU's 'A+' rating primarily reflects consistently
positive, albeit declining, operating results that are driven by stable
to growing enrollment; and an adequate balance sheet cushion. These
strengths are offset by an atypically high reliance on student-generated
revenues and an increasing pro forma debt burden.
STABLE STUDENT DEMAND: Enrollment has grown steadily over the past
several years as demand has remained strong from both in- and
out-of-state applicants. The university's revenue mix benefits from
out-of-state tuition levels which are instrumental in generating
consistently positive margins.
HIGH DEBT BURDEN: CCU's track record as an independent state institution
is limited and, in the course of maturing, may require on-going
investment in facilities and programs, portions of which may be
debt-financed. While financial leverage increased significantly in
recent years and CCU maintains a high pro forma debt burden, most
debt-financed projects have been related to student housing that is
expected to be self-supporting.
LIMITED STATE SUPPORT: While state appropriations are not a significant
source of operating revenue, resulting in CCU's high tuition dependency
for a public institution, management has successfully managed through
cycles of state cuts (South Carolina GOs rated 'AAA' by Fitch) with
steady enrollment growth and periodic tuition and fee increases.
Moreover, CCU benefits from a local optional penny sales tax which
provides an additional, steady source of income to fund capital needs.
ADDITIONAL DEBT: Based on CCU's limited balance sheet cushion relative
to outstanding financial leverage and high pro forma debt burden, Fitch
considers the university's additional debt capacity as limited and Fitch
would expect any additional indebtedness to require a corresponding
increase in unrestricted financial resources in support of the
OPERATING MARGIN STABILITY: Rating stability is also predicated upon
CCU's ability to maintain positive operations, thereby generating
adequate debt service coverage and offsetting its increased leverage
CCU, located in Conway, near Myrtle Beach, SC, was founded in 1954 by
Horry County citizens as a two-year college under the College of
Charleston. In 1958, benefitting from a tax levy referendum, CCU became
a campus of the University of South Carolina system (revenue bonds rated
'AA' by Fitch) and subsequently started awarding four-year baccalaureate
degrees in 1974. CCU became an independent state supported institution
in 1993. CCU offers undergraduate degrees in 65 fields of study, seven
master degree programs and one doctoral program.
ENROLLMENT GROWTH DRIVES OPERATIONS
Headcount, as a result of sustained demand, has increased over the past
several years. Fall 2013 headcount totaled 9,478 students, up 1.5% from
fall 2012 and up 13.4% since fall 2009. Full-time equivalent enrollment
increased to 8,870, up 12.8% over the same five-year period. Freshmen
applications to CCU have increased substantially as well, with the
university's acceptance and matriculation rates averaging about 72% and
27%, respectively. Due to enrollment growth over the past several
decades and CCU's transition to a traditional four-year institution, the
university has been investing in student housing.
Approximately 36% of total headcount presently resides on campus, with
freshmen and sophomores required to live on campus. Based on historical
enrollment growth as an indicatr for student housing demand, CCU
undertook the project that will add a total of 1,274 on-campus beds by
fall 2016. Fitch also notes that CCU's traditional student mix includes
46% of out-of-state students (above average for a public institution)
and acknowledges the favorable effect of this mix on CCU's financial
performance. While CCU's resident tuition remains below the state
average ($9,760 vs. $10,467), management remains conscious of student
affordability and has kept undergraduate resident tuition flat for the
past three years (fall 2011 to fall 2013). However, tuition is expected
to increase slightly for the 2014-2015 academic year.
The university is supported by a property tax millage within Horry
County (GOs rated 'AA+' by Fitch) and by a portion of a county-wide
local option sales tax collected through fiscal 2024, which mitigated
the impact of state funding cuts in recent years. However, state
appropriations increased slightly in fiscal 2013 due to non-recurring
funds for investment in CCU's new doctoral program. Positive operations
are somewhat tempered by the university's high reliance on tuition, fees
and auxiliary revenues for operating support (70% in fiscal 2013), which
is relatively high for a public institution. State appropriations
represented a low 6.5% of total operating revenues in fiscal 2013.
CCU's ability to generate consistent surpluses is reflected by an
average operating margin of 10.9% over the past five fiscal years
(2009-2013); 2.9% in fiscal 2013. The decline in fiscal 2013 performance
was largely attributed to CCU taking on a triple-net, 30-year capital
lease for University Place (UP) from the CCU Student Housing Foundation
(the foundation). UP is a 2,100-bed student housing complex owned by the
foundation and located a half mile away from CCU's campus. The complex
is now managed by CCU as part of its overall housing system and remains
fully occupied. Starting in fiscal 2013, the revenues and expenses
associated with the facility were transferred to CCU's financial
reporting; notably, rental revenue and related expenses such as
interest, depreciation and utility costs. Importantly, Fitch notes that
UP is expected to remain self-supporting. At the end of the lease, CCU
has the option to purchase the facility from the foundation for $1,
which Fitch views favorably.
Due to the absorption of the operations of UP, Fitch expects CCU's
operating margin to remain approximate to current levels going forward.
Management noted that they anticipate the university's fiscal 2014
operating margin to be similar to the fiscal 2013 level.
ADEQUATE FINANCIAL CUSHION TEMPERED BY HIGH DEBT BURDEN
Balance sheet resources remain limited but adequate for the rating
category. Available funds, calculated as total cash and investments less
non-expendable restricted net assets, totaled $78.4 million as of June
30, 2013 and represented an adequate 47.3% of fiscal 2013 operating
expenses ($166 million), but a low 24.5% of pro forma debt
(approximately $320 million). Debt includes university revenue bonds
(about $108 million on a pro forma basis), state institution bonds
($62.6 million), and the UP capital lease ($148 million). CCU's modest
balance sheet cushion is partially offset by its historically solid,
albeit declining, operating margin. The decline in the margin over the
past few years is partly attributed to reduced state appropriations, in
conjunction with the university's tuition freeze.
Revenue bonds are all fixed-rate debt, with a somewhat front-loaded pro
forma debt service schedule, which Fitch continues to view favorably.
Total pro forma MADS occurs in fiscal 2018 at about $24 million, with
average annual debt service (AADS) totaling about $16.5 million. CCU's
pro forma debt burden remains high, with MADS consuming 14.1% of fiscal
2013 operating revenues ($170.1 million). Fitch considers a debt burden
of 10% and above as high for colleges and universities. The AADS burden
is slightly more manageable at 9.7%.
Partially offsetting the high burden is CCU's consistent generation of
adequate MADS coverage from net operating income. MADS coverage was at
or just above 1x in each of the past four fiscal years, including in
FY13. AADS coverage was a sound 1.4.x in fiscal 2013. Importantly, as
discussed above, CCU's debt-financed housing facilities are expected to
be self-supporting, also partially mitigating concern over the
university's high debt burden.
Management has cited no significant capital needs beyond the series 2014
project, which Fitch views favorably. CCU intends to save the annual
revenues it receives from its share of the Horry County sales tax
(expected to raise a total of $132 million from 2009 - 2023) to fund
future capital expenditures, as well as cash on hand and fundraising.
Based on CCU's limited balance sheet cushion relative to outstanding
financial leverage and high pro forma MADS burden, Fitch considers CCU's
additional debt capacity as very limited at the current rating level.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'U.S. College and University Rating Criteria' (May 10, 2013);
--'Coastal Carolina University, South Carolina' (Feb. 8, 2013);
--'Fitch Rates South Carolina's $146MM GOs 'AAA' (Nov. 19, 2013);
--'Fitch Affirms Horry County, SC's GO Bonds 'AA+'; Outlook Stable'
(Oct. 2, 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria
Coastal Carolina University, South Carolina
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