|[July 17, 2014]
Fitch Rates University of Akron, OH's Revenue Bonds 'AA-'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings has assigned an 'AA-' rating to approximately $28.8
million University of Akron (UA) general receipts bonds, series 2014A
(the bonds), which are expected to sell via negotiation the week of July
28. Proceeds of the bonds will be used to refund all of the outstanding
series 2003A and series 2004B bonds and to pay costs of issuance.
In addition, Fitch affirms the outstanding ratings on the following
bonds issued by UA:
--$380.4 million of outstanding UA general receipts bonds at 'AA-';
--$32.6 million of outstanding Summit County Port Authority (SCPA)
student housing lease revenue bonds, series 2011 (UA student housing
project) at 'AA-'.
The Rating Outlook is Stable.
General receipts bonds are special obligations of UA secured by a first
lien on general receipts, which exclude state appropriations. Student
housing lease revenue bonds are secured by a master lease agreement
between UA and SCPA, with lease payments made by the university equal to
annual debt service. Lease payments are general obligations of the
KEY RATING DRIVERS
STABILIZING CREDIT CHARACTERISTICS: The 'AA-' rating reflects UA's large
enrollment base, modest but adequate balance sheet cushion, and limited
capital needs. The Stable Outlook reflects steady state appropriations
and the expectation of improvement in enrollment and financial
performance in fiscal 2015. Offsetting factors include enrollment-driven
operating pressure and a moderately high debt burden.
OPERATING IMPROVEMENT PROJECTED: Recent enrollment declines drove
negative GAAP-based operating performance and lower debt service
coverage in fiscal 2013. UA has made sizeable expense reductions in
fiscal 2014, which Fitch believes will improve margins in fiscal 2015.
Capacity to make further cuts or increase tuition prices is somewhat
limited. Longer-term financial health will depend on enrollment trends.
ENROLLMENT PRESSURES PERSIST: Full-time equivalent (FTE) enrollment fell
sharply by 6.5% in fall 2013, after falling 3.4% in fall 2012. A
strategic tightening of admissions standards, along with a competitive
market and unfavorable demographic trends in the region, drove the
decline. Preliminary data shows that new admissions and retention are
tracking ahead of the prior year although overall enrollment is expected
to decline modestly in fall 2014. The rating and outlook assumes that
improvements will materialize as expected by management.
ADEQUATE BALANCE SHEET CUSHION: UA's financial cushion remains stable.
Available funds provide a modest but adequate cushion relative to
operating expenses and outstanding debt despite a slight dip in balance
sheet resources in fiscal 2013.
MODERATELY HIGH DEBT BURDEN: UA's moderately high pro forma debt burden
is partially offset by its acceptable debt service coverage from
operations, including endowment income, and limited capital plans going
forward. Coverage levels have tightened in the past two years due to
weaker operating margins.
OPERATING PRESSURE: Failure to show improvement toward breakeven or
positive GAAP-based operating performance by fiscal 2015 would likely
result in negative rating action.
DEBT MANAGEABILITY: The issuance of additional debt, while not
anticipated, without a commensurate growth in financial resources and
revenues would yield negative rating pressure.
Originally founded in 1870, UA is one of 13 public universities in the
state of Ohio (general obligation bonds rated 'AA+'/Stable Outlook). In
addition to its main 218-acre Akron campus, which is comprised of nine
degree-granting colleges, UA has five other locations throughout
ENROLLMENT OWN; STABILIZATION EXPECTED
FTE enrollment declined by 3.4% in fall 2012, followed by a sharp 6.5%
decline in fall 2013. While the larger than anticipated decline reflects
a competitive regional market, some declines were expected based on a
shift in admissions strategy. UA, which had practiced open enrollment on
its main campus, implemented a new structure with tighter admissions
standards and more intensive advising and support for enrolled students.
Fitch expects the new strategy to improve retention and graduation
metrics, which are important under Ohio's performance funding system,
but will continue to depress enrollment somewhat over the short term.
Preliminary data presented to Fitch suggests that the fall 2014
admissions will be stronger than fall 2013, while fall 2014 enrollment
is expected to decline slightly as a result of smaller incoming classes
in prior years. UA attributes this growth largely to improved recruiting
practices including more effective marketing, better allocation of
financial aid dollars, and pairing of admission decisions with aid
packages for admitted applicants. Fitch expects UA's enrollment to
stabilize and improve over the medium to long term based on preliminary
admissions results and early indications of improving retention. Failure
to realize such improvement would likely result in negative rating
FINANCIAL PERFORMANCE REMAINS PRESSURED
Larger than anticipated enrollment declines coupled with increased
expenses drove a negative 3.6% operating margin in fiscal 2013,
inclusive of endowment support. Fiscal 2014 operations are expected to
improve toward breakeven on a full accrual basis largely due to
significant expenditure reductions, despite further enrollment declines
in fall 2013.
The fiscal 2015 budget remains pressured by limited tuition-raising
flexibility, lower enrollment, and expense pressures. Positively, state
operating appropriations were stable in fiscal 2013 and 2014, after
declining in fiscal 2012 with the end of federal stimulus funds. State
appropriations are expected to improve in fiscal 2015 given UA's solid
performance funding metrics according to management.
Fitch expects investment grade institutions to produce breakeven results
on average. Short-term fluctuations in operating performance are not
necessarily a concern, although a trend of negative operating
performance coupled with a shift in UA's enrollment strategy would
negatively pressure the rating.
ADEQUATE BALANCE SHEET RESOURCES
Balance sheet resources have remained fairly stable over the past few
years and provide a modest but adequate financial cushion. Available
funds (cash and investments less nonexpendable restricted net assets)
totaled $206.8 million as of June 30, 2013. Available funds covered
fiscal 2013 operating expenses and pro forma debt by an adequate 40.8%
and 45.4%, respectively.
The university also benefits from fundraising and endowment support.
Having recently completed a $1 billion comprehensive campaign and
experiencing strong investment returns in 2013, UA's endowment
investments totaled $225 million in May 2014, held between the
university and the legally separate UA Foundation. These
donor-restricted funds are not included in available funds, but support
the university's operations through annual distributions of investment
MODERATELY HIGH DEBT BURDEN
UA's debt burden is moderately high. Pro forma maximum annual debt
service (MADS) of $47.2 million (in 2029), which includes a roughly $15
million bullet maturity, consumes a high 9.7% of fiscal 2013 operating
revenues. Excluding the bullet maturity, adjusted MADS of $38.8 million
(in 2018) is more manageable, consuming 7.9% of fiscal 2013 operating
revenues. Pressured fiscal 2013 operations provided very slim coverage
of adjusted MADS of 1.1x.
Fitch views the university's conservative debt profile, which is all
fixed rate and primarily amortizing, as a credit positive. The current
refunding will also generate a present value savings of approximately
$1.5 million, using a level savings structure, with no change to the
final maturity of the bonds. Following significant debt-funded capital
expansion in recent years, UA has limited capital plans and no new debt
plans in the near term.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 2014);
--'Fitch Rates University of Akron (Ohio) Revs at 'AA-'; Outlook Stable'
(May 31, 2013);
--'Fitch Rates Ohio's $251MM GO Highway Bonds 'AA+'; Outlook Stable'
(May 14, 2014).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
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DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
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