|[September 03, 2014]
Fitch Affirms Suffolk University, MA Bonds at 'BBB'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'BBB' rating on the following outstanding
bonds issued on behalf of Suffolk University (Suffolk):
--$66.3 million tax-exempt Massachusetts Development Finance Agency
revenue bonds, series 2010;
--$290.7 million tax-exempt Massachusetts Health and Educational
Facilities Authority (MHEFA) revenue refunding bonds, tax-exempt series
A and taxable B (2009).
The Rating Outlook is Stable.
The bonds are a general obligation of the university, secured by a
mortgage on certain properties. The series A & B (2009 bonds) are
additionally secured by a cash-funded debt service reserve.
KEY RATING DRIVERS
POSITIVE OPERATING MARGINS: Suffolk's consistently positive operating
performance, adequate balance sheet ratios for the rating category, and
adequate coverage of maximum annual debt service (MADS) support the
HEAVY RELIANCE ON (News - Alert) STUDENT REVENUES: Student-generated revenues provide
nearly all of Suffolk's annual operating revenues, underscoring the need
for carefully managed enrollment and budgeting, particularly given the
highly competitive operating environment in New England and the
university's large law school.
HIGH DEBT LEVERAGE: MADS is a high 12.2% of fiscal 2013 operating
revenues. The conservative fixed-rate debt structure, combined with the
university's demonstrated ability to generate operating surpluses,
adequate MADS coverage, and no additional debt plans somewhat mitigate
ENROLLMENT VOLATILITY: Suffolk has maintained positive operating margins
in recent years even with undergraduate and graduate enrollment declines
(particularly the large law school program). However, enrollment and net
tuition revenue trends need to stabilize to support long-term operating
SENIOR MANAGEMENT CHANGES: Suffolk's new president resigned recently
after only two and a half years, leaving the university with an interim
president and a new provost. While other senior positions have been more
stable, these high level position turn-overs are a credit concern.
INCREASED DEBT LEVERAGE: Growth in Suffolk's already high MADS burden
(12.2% in fiscal 2013) could negatively pressure the rating.
MARGIN EROSION: Significant declines in operating margins or lower MADS
coverage could trigger a negative rating action.
ENROLLMENT PRESSURES: Continued enrollment declines could reduce the
university's balance sheet strength and financial flexibility and lead
to a negative rating action.
Suffolk is a private university located in downtown Boston,
Massachusetts and serves a diverse mix of undergraduate and graduate
students. Originally founded in 1906 as a stand-alone law school, the
university's programming expanded to include a college of arts and
sciences (CAS) and the Sawyer business school. About 70% of the 7,833
fall 2013 full-time equivalent (FTE) students are undergraduates.
Approximately 25% of undergraduate students live on campus. The business
school provides both undergraduate and graduate education. The law
school has shrunk, but continues to be the largest graduate college at
Suffolk. In fall 2013 it enrolled 1,380 FTE students, down from 1,466in
fall 2012, but still about 18% of total university FTE enrollment. Law
school enrollment for fall 2014 is expected to decline again, but remain
well within budget assumptions.
POSITIVE OPERATING MARGINS
Suffolk consistently produces positive operating margins (including the
endowment draw). In the past five fiscal years (2008-2013), surpluses
averaged 5.3%. The operating margin for the fiscal year ending June 30,
2013 was 6.3%, stronger than 4.9% in fiscal 2012. University management
projects fiscal 2014 operating results will be similar to fiscal 2013
(the audit is not yet available). Fitch views these operating results as
impressive given enrollment and expense stresses in recent years.
Net student tuition and fee revenue typically comprises a high 94%-95%
of operating revenues. Fitch notes that net student revenue has
fluctuated slightly in recent years, with declines in both fiscal 2013
and projected fiscal 2014. This is due to enrollment declines in the
sizable law school as well as a large entering class (fall 2008)
completing the academic cycle. Net tuition revenue dipped 1.9% in fiscal
2013, which was consistent with Suffolk's projections; Suffolk still
increased its overall operating margin by managing expenses.
Fitch views student fee dependence as a continuing challenge for
Suffolk, particularly given the highly competitive New England higher
education market. However, to date, Suffolk's conservative budgeting
strategies have provided sufficient flexibility to manage fluctuations
in enrollment and net student revenue. For fiscal 2014, another
operating surplus is projected. The fiscal 2015 budget is also balanced
on a GAAP basis, with a surplus projected. The university announced some
lay-offs in fiscal 2014 (primarily in the law school and IT division) as
well as a salary freeze in fiscal 2015.
HIGH DEBT BURDEN BUT ADEQUATE MADS COVERAGE
The university's operating surpluses help offset a MADS burden that
Fitch views high at 12.2% of fiscal 2013 revenues. Net income available
for debt service in fiscal 2013 provided an adequate 1.6x MADS coverage
(MADS occurs in 2039), which somewhat mitigates concern regarding the
university's ability to meet its obligations. Current debt service
coverage in fiscal 2013 was a stronger 2.0x.
Suffolk's ability to demonstrate debt service coverage from operations
is particularly important given its revenue concentration and recent
enrollment. The university has no new debt plans at this time; total
debt was about $351 million at July 15, 2014. Suffolk cash-defeased $4.5
million of bonds in July 2014 from real estate proceeds, which Fitch
considers positively. The defeasance did not change MADS.
BALANCE SHEET CONSISTENT WITH RATING CATEGORY
Available funds, defined by Fitch as cash and investments not
permanently restricted, were $196 million at June 30, 2013, and have
increased nominally in each fiscal year since at least 2009. This
represented 85% of fiscal 2013 operating expenses and 53% of outstanding
debt, ratios Fitch considers consistent with the rating category. Based
on preliminary information, available funds ratios for fiscal 2014 are
expected to be similar to, or slightly stronger than, fiscal 2013.
Continued generation of operating surpluses combined with no new debt
should allow the university to maintain or grow available funds ratios
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria', dated May 2014;
--'Fitch Affirms Suffolk University, (MA) Bonds at 'BBB'; Outlook
Stable', dated Sept. 04, 2013.
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
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