|[May 14, 2014]
Fitch Affirms Linn State Technical College, MO's Rev Bonds at 'BBB'; Outlook Revised to Negative
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed the 'BBB' long-term rating on approximately
$7.7 million of outstanding series 2006 auxiliary revenue bonds issued
by Linn State Technical College (LSTC or the college).
The Rating Outlook is revised to Negative from Stable.
The bonds are special obligations of the college payable solely from net
auxiliary system revenues, including dining facilities, bookstore,
residence halls, commons building and activity center (pledged
revenues). A cash-funded debt service reserve fund equal to maximum
annual debt service (MADS) has been established.
KEY RATING DRIVERS
RATING AFFIRMED; OUTLOOK TO NEGATIVE: The 'BBB' rating represents
healthy demand for LSTC's academic and vocational programs and its
distinctive niche in post-secondary education in the state which drives
demand for its auxiliary services. Offsetting these strengths are LSTC's
limited balance sheet resources and multiple years of negative margins,
compounded by a challenging state funding environment. The Negative
Outlook is driven by the auxiliary system's failure to meet its annual
debt service (ADS) coverage requirement in fiscal 2013.
INADEQUATE AUXILIARY COVERAGE: Pledged revenues generated in fiscal 2013
provide ADS coverage below the 1.25x rate covenant. The Negative Outlook
reflects Fitch's uncertainty around projected improvements in fiscal
2014 given weak budgeting practices that do not ensure system covenant
compliance, in addition to management's apparent lack of system
GROWING ENROLLMENT: Sustained demand for LSTC's diverse and advanced
programs has resulted in annual enrollment growth which is positive for
fueling growth in pledged revenues. LSTC's full time equivalents (FTE)
achieved a record-high level for fall 2013.
COLLEGE'S IMPROVED OPERATIONS: Although still negative on a combined
GAAP-basis, the college's operating performance modestly improved in
fiscal 2013 though management projects slightly negative fiscal 2014
margins due to an increase in expenses related to program expansion and
increased salary/benefit costs.
ADEQUATE PLEDGED REVENUES: A return to Stable Outlook is predicated on
the college's ability to generate sufficient net cash flow from the
auxiliary system to meet the 1.25x coverage requirement in the near term
(fiscal 2014), following a year in which the debt service coverage
covenant was violated.
ADDITIONAL AUXILIARY DEBT: Although not planned, issuance of additional
system debt, without a commensurate increase in pledged revenues
available for repayment, could diminish coverage levels which may
negatively impact the rating.
OPERATING PERFORMANCE: Inability to implement effective cost control
measures, coupled with a material shift in enrollment-related revenue or
state support, could negatively impact operating performance and the
rating. Conversely, Fitch notes that LSTC's consistent ability to
generate positive margins over the long term would be positive for the
Founded in 1961, LSTC is a two-year, publicly-supported vocational and
technical school with its main campus located in Linn, Missouri (the
state's general obligation bonds are rated 'AAA' by Fitch). LSTC is the
only state-supported, post-secondary technical educational center in
Missouri. Offering advanced technical education in both traditional and
emerging technologies, the college is state and federally funded and
supports economic development in the state. As of July 1, 2014, the
college will be renamed the State Technical College of Missouri.
AUXILIARY SYSTEM DEBT
The system comprises the cafeteria, bookstore, housing, and activity
center. The college's total long-term debt outstanding is composed
entirely of system debt ($8.8 million). On a combined basis, the
college's MADS burden is moderately low at 4.1% (based on unrestricted
operating revenues of $20.6 million). Positively, combined net income of
the college covers system MADS ($838,000 in 2024) by a strong 3.5x.
While the college expresses a willingness to support system debt service
from consolidated resources, if necessary, there is no legal requirement
to do so. Further, no additional debt issuance is expected in the near
term, which reflects positively on LSTC's overall leverage ratios.
INSUFFICIENT SYSTEM CASH FLOW
In fiscal 2013, net operations of the sytem were negative $67,000,
after positive results of $53,000 in fiscal 2012 which management
attributes largely to non-recurring expenses in the student activity
center that year. However, Fitch notes that while a decrease in
system-wide net cash flows from operations is partly due to
non-recurring repair and replacement costs, certain increased operating
expenses, including salary and benefit costs and higher utility costs,
are expected to be recurring. Fitch believes that, without careful
management of expenses, this could lead to insufficient net cash flow of
the auxiliary system to meet the required coverage requirement in the
The bond rate covenant requires that LSTC generate net system auxiliary
revenues equal to 1.25x system ADS. On a net auxiliary system revenue
basis, fiscal 2013 pledged revenues ($779,500) covered system ADS
($649,000) by 1.20x, which is lower than the requirement and the
previous year's coverage of 1.34x.
Management is projecting an increase in auxiliary system net cash flow
in fiscal 2014. Positively, LSTC's combined fiscal 2014 interim
financials (for the first six-month period) reflect auxiliary enterprise
revenues are tracking slightly ahead (2.3%) of the same time last year
and auxiliary expenses are tracking 12.3% behind the same period last
year. While projections provided to Fitch appear reasonable, Fitch is
unable to ascertain which expenses across all auxiliary services are
recurring given the lack of any budget plan for the enterprises of the
system. An increase in recurring expenses could make it difficult for
coverage to return to historical levels expected for a 'BBB' rating.
The Negative Outlook reflects Fitch's uncertainty regarding the system's
projected fiscal 2014 performance which is based on weak budgeting
practices. Currently, the college's budgeting process for its auxiliary
operations does not specifically plan for compliance with the coverage
requirement under the rate covenant. While the college is working to
remedy the situation, an inability to generate projected coverage in
fiscal 2014 may negatively impact the rating.
NICHE PROGRAMS DRIVE HEALTHY DEMAND
Headcount enrollment growth remains strong, increasing 6.8% in fall 2013
(and 13.3% over the past five years, i.e. fall 2009-2013). Fall 2013 FTE
enrollment reached a record high of 1,294 students. LTSC offers both day
and evening courses with a limited physical plant that is capable of
accommodating approximately 1,800 students.
LSTC fills a distinctive niche in post-secondary education in the state
offering technical education ranging from an FAA-certified aviation
maintenance program to the country's only associate degree in applied
science focused on nuclear energy. LSTC is supported by a diverse group
of business and industry partners looking to maintain a pipeline of
qualified technical workers and whose input generates a unique
programming mix (not easily replicated) which limits competition and
drives student demand.
As of April, 2014, the college has received 1,532 applications,
comparing favorably over same period last year. While acceptances to
date are down 55 students over the prior year, LSTC is an
open-enrollment institution. According to management, as the college's
programs become more selective the quality of the incoming class is
expected to improve. Programs have limited capacities and are typically
set based on an assessment of the job market and local demand for
workers. The college's increasing selectivity is tied to job market
over-saturation which would hurt the college's job placement rates, an
important funding metric for state support.
COLLEGE'S SMALL BUT DIVERSIFIED OPERATIONS
Student generated revenues and annual state appropriations remain the
college's largest funding sources (42.8% and 21.7% of fiscal 2013
revenues, respectively). Due to the volatile state funding environment
in Missouri, the appropriations share has declined over the past few
years, but has largely stabilized in fiscal 2013. Actual state
appropriated funding for fiscal 2014 (reported by the CFO) increased
5.3% to $4.71 million, essentially matching funding expectations. This
includes a nominal amount of performance funding.
In fiscal 2013, LSTC's combined operating margin (GAAP-basis) modestly
improved. The college generated close to break-even operating results
(-0.2%) in fiscal 2013, up from (-0.6%) in fiscal 2012, which is viewed
favorably after several years of negative operation. In fiscal 2014, the
college is conservatively expecting a slightly greater GAAP operating
deficit than in fiscal 2013, but is expecting break-even cash-flows.
According to management, enrollment growth/new program expansion drove
up expenses in fiscal 2014. A 2% increase in salary expense and benefit
costs/retirement contributions was partially planned for fiscal 2014
after a five-year salary freeze.
COLLEGE'S LIMITED CUSHION IMPROVES
The college's available funds, or cash and investments not permanently
restricted, provide a fairly limited financial cushion but grew a
healthy 16.84% to $7.64 million in fiscal 2013 which, while not pledged,
is viewed favorably by Fitch.
For fiscal 2013, available funds represent 37% of operating expenses and
86.6% of total long-term debt. Positively, available funds are highly
liquid with minimal exposure to alternative asset classes (private
equity and hedge funds). Fitch views favorably the growth in the
college's financial cushion which would enable the college to support
and cash-flow shortfall of the system, if necessary, although they are
not legally required to do so.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 12, 2014);
--'Fitch Affirms Linn State Technical College, MO's Rev Bonds at 'BBB';
Outlook Stable', dated May 22, 2013.
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria--Effective May 10, 2013--May
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