|[June 18, 2014]
Fitch Affirms Methodist University's Revs at 'BBB'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings affirms its 'BBB' rating on approximately $16.9 million
North Carolina Capital Facilities Finance Agency revenue bonds, series
2012 issued on behalf of Methodist University (MU, or the University).
The Rating Outlook is Stable.
The bonds are a general obligation of the university. Further securing
the bonds are a fully funded debt service reserve fund (DSRF) and a
mortgage on the core campus.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'BBB' rating primarily reflects a
track-record of healthy operating performance, which supports good debt
service coverage, and improving enrollment trends. Counterbalancing
factors include a relatively small enrollment base, very high reliance
on student charges for operating revenues, and significant exposure to
variable rate demand bonds (VRDBs) and related risks.
POSITIVE OPERATING PERFORMANCE: MU's GAAP-based operating margin, though
weakened in fiscal 2013, remained positive, which is consistent with
Fitch's expectations for private colleges and universities. Based on
interim financials, fiscal 2014 year-end results are expected to be
comparable to the preceding year.
IMPROVING ENROLLMENT TRENDS: MU's fall 2013 incoming freshmen class
reflected a five-year high; however, the revenue impact is expected to
be tempered by increased financial aid assistance and a tuition increase
that was below-average relative to historic increases. Preliminary
admissions statistics for fall 2014 are trending ahead of the same time
LIMITED REVENUE DIVERSITY AND LIQUIDITY: MU regularly derives over 85%
of unrestricted operating revenues from student tuition and fees. While
this level of reliance on student charges is not atypical for private
colleges, prudent enrollment forecasting and management is integral,
particularly in light of MU's balance sheet strength.
SIGNIFICANT EXPOSURE TO VRDBs: MU's floating rate debt is high at 52.5%
of the debt and 50% is un-hedged. Fitch believes the rating level
denotes MU's limited ability to manage the potential risks presented by
its variable rate exposure. Debt-plans at present time are limited and
are not expected to materially impact existing debt manageability.
MARGIN EROSION: Given the university's limited balance sheet
flexibility, rating stability is contingent upon the continued
generation of positive GAAP-based operating performance. Unmanaged
fluctuations in student demand could negatively impact financial
performance and drive downward rating pressure.
DEBT MANAGEABILITY: While not anticipated at present time, the issuance
of additional debt beyond stated plans without a commensurate growth in
financial resources and revenues would yield negative rating pressure.
Methodist University, located in Fayetteville, NC was founded as
Methodist College in 1956, initiated operations in 1960 and graduated
its first class in 1964. The university serves a diverse set of
traditional residential students, commuters, soldiers from a nearby
military base, Fort Bragg (the base) as well as evening and part-time
students. The university's regional accreditation with the Southern
Association of Colleges and Schools Commission on Colleges was most
recently re-affirmed in 2009 for a 10-year term.
ADEQUATE FINANCIAL PROFILE
Fiscal 2013 operations, adjusted for the endowment payout, generated a
1.3% margin, weaker than the preceding three-year average of 6.2%.
Fiscal 2013 total operating revenues declined by 0.5%, in part due to an
enrollment dip in fall 2012 that adversely impacted student-derived
income. Simultaneously, total operating expenses rose by 3.4%, due
primarily to compensation-related adjustments and an increase in
interest and depreciation-related expenses. MU's six month financial
results (as of December 2013) indicate a comparable margin for fiscal
2014, supported by growth n fall 2013 total headcount enrollment and
related student-derived revenues.
Fitch considers positive operating stability to be integral to rating
stability, particularly in light of the university's limited balance
sheet flexibility. Available funds, defined as cash and investments less
permanently restricted net assets, totaled $18.4 million as of June 30,
2013, above the $16.4 million recorded in the prior year-end. Balance
sheet growth has been supported by the retention of annual operating
surpluses for the purposes of pursuing future capital expenditures.
Fiscal 2013 available funds comprised 38.7% of fiscal 2013 operating
expenses and 48.2% of pro forma debt. These metrics are consistent with
the 'BBB' category for Fitch-rated private colleges and universities,
but nevertheless represent a limited capacity to response to unplanned
operating deficits or a market downturn.
IMPROVING ENROLLMENT TRENDS
Typical of regional private universities, MU relies primarily on
tuition, fees, and auxiliary revenue for its operations. Of the total,
at least 85% of operating revenues are regularly generated through
student tuition and fees. Fall 2013 total headcount enrollment grew by
4.4% over the prior year, to 2,463, supported by the largest incoming
freshmen class in the university's history. To help bolster enrollment,
management limited the tuition increase to 3.49% for academic year
2013-2014, which was below-average relative to historic increases, and
increased funds for financial assistance.
Management expects to provide additional institutional aid in fiscal
2015; however, this will be supplemented with adjustments in student
charges, which is expected to support continued revenue growth. Further,
preliminary admissions statistics suggest that undergraduate enrollment
growth will continue for fall 2014, which will enhance revenue
generation. Management reported that no significant expense pressures
are being anticipated in the fiscal 2015 budget.
Importantly, active duty soldiers and military-related students (e.g.
veterans, spouses, dependents, etc.) regularly represent approximately
20% of total headcount enrollment, which underscores the university's
significant exposure to military personnel and related federal benefits.
Military tuition assistance was temporarily suspended as a result of
sequestration, which affected students in the spring and summer 2013
terms; however, funding has since been restored and no cuts are
anticipated at present time. Furthermore, the maximum tuition
reimbursement for private colleges and universities under the post-911
GI bill increased for academic year 2014-2015, which is a credit
positive for MU's enrollment base.
SIGNIFICANT EXPOSURE TO VRDBs
Existing debt, outstanding in the approximate amount of $37.6 million,
includes 2012 fixed rate bonds ($16.9 million) and series 2005 VRDBs
($18.7 million). The VRDBs are supported by Wells Fargo (News - Alert) Bank, N.A.
(rated 'AA-'/Outlook Stable/'F1+' by Fitch) letter of credit (LOC).
Management recently renewed the LOC for an additional three-year term
(expires Oct. 15, 2016). Fitch notes positively that the university
continues to maintain satisfactory headroom under the financial
covenants associated with the LOC.
MU has swapped 50% of the series 2005 variable-rate debt to fixed rate
with Bank of America, N.A. and Wells Fargo, N.A., both of which expire
in March 2020 and do not require collateral postings. The unhedged
portion of variable-rate debt accounted for 26.3% of the total debt
portfolio as of June 30, 2013, which is atypical relative to other
Fitch-rated private colleges and universities in the 'BBB' rating
MU's maximum annual debt service (MADS), which comes due in fiscal 2030
and assumes an interest rate of 3% on the un-hedged portion of variable
rate debt, represented a moderate 6.1% of fiscal 2013 unrestricted
operating revenue and compares favorably to 'BBB' rated medians. Fitch
notes positively that MU regularly generates good coverage of pro forma
MADS from net available income (1.7x in fiscal 2013). Current debt
service coverage for fiscal 2013 was a stronger 2.1x.
The university is presently in the midst of a $35 million capital
campaign, $20 million of which is in support of various capital
projects. Near-term debt plans are limited to a manageable $4.5 million
commercial loan to help partially fund the construction of a new Health
Sciences Building to house new (Doctorate of Physical Therapy and
Masters of Occupational Therapy) and existing (Applied Science and
Athletic Training) programs. The remaining portion of the project, which
is estimated to cost $12 million, is expected to be funded through
fundraising and internal reserves.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'College and University Rating Criteria,' dated May 2014;
--'Fitch Affirms Methodist University's Revs at 'BBB'; Outlook Stable,'
dated June 28, 2013.
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
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