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Fitch Affirms Florida Gulf Coast Univ Fin Corp.'s Revs; Removes From Watch Negative; Outlook StableFitch Ratings affirms the following various outstanding capital improvement revenue bonds issued by the Florida Gulf Coast University Financing Corporation (Corporation) on behalf of Florida Gulf Coast University (FGCU, or the university): --Approximately $166.6 million (Housing Project) at 'A+'; --Approximately $8.8 million (Parking Project) at 'A+'; --Approximately $5.4 million (Student Union Project) at 'A'. The bonds are being removed from Rating Watch Negative reflecting Fitch's expectation that a proposed extension of notice provisions and modifications to Events of Default, and the addition of a 30 day cure period related to a non-credit covenant violation under the loan agreement with STI Institutional & Government Inc. (STI), which could trigger an acceleration of all parity debt, will be executed in a timely manner. Fitch believes that the proposed amendment provides the corporation adequate time to react to a default situation, and to consider refinancing or repaying the STI loan with the corporation's unrestricted internal resources with board approval. Failure to execute the proposed amendment could result in restoration of the Rating Watch. The Rating Outlook is Stable. SECURITY The bonds are a general obligation of the corporation, payable from lease payments received under an amended and restated operating lease with the university. Under the operating lease, the university pledges as security for lease payments net revenues derived from the housing, parking and student union enterprises. The housing system is supported by a broad auxiliary system pledge and revenues derived from its 4,756-bed housing system, while the parking system is supported by an unlimited-student fee pledge. Lease payments are structured to equal debt service on the related housing, parking and student union bonds. Additional security provisions include a segregated debt service reserve fund. KEY RATING DRIVERS STABLE CREDIT CHARACTERISTICS: FGCU's high student demand for auxiliary services, which generate good debt service coverage, underpins Fitch's ratings on the housing, parking and student union capital improvement bonds. These positive attributes somewhat offset FGCU's exposure to variable rate debt. STRONG DEMAND: Rapid enrollment growth at the university has fueled use of auxiliary services, bolstering net revenues. Student demand for auxiliary services underpins the ratings on the housing, parking, and student union revenue bonds. Continued gains in enrollment, coupled with increased auxiliary fees, are expected to strengthen pledged revenues over time. HEALTHY COVERAGE: Housing, parking and student union-related debt has historically enjoyed healthy coverage of debt service. Projected coverage levels for housing are expected to decline, but remain adequate, as additional debt service comes online. However, these projections appear conservative. RATING SENSITIVITIES DEBT SERVICE COVERAGE: Healthy debt service coverage from net revenues is the primary driver for the housing system, parking system and student union bonds. Inability to maintain adequate levels, despite the issuance of additional debt in support of the university's growing enrollment, could pressure the rating. INCREASING HOUSING SYSTEM DEBT: Issuance of additional debt in the absence of demonstrated demand for additional housing may diminish currently adequate coverage levels and would negatively impact the rating. REVERSAL OF MARGIN TREND: The university's operations have improved in fiscal 2014. The inability to maintain break-even to positive operations, coupled with erosion of somewhat limited financial resources, could pressure the university. The focus on FGCU's operations is necessary to offset a large depreciation expense and risks associated with variable rate exposure leading to a potential call on liquidity. ADEQUATE RESOURCES: Failure of the corporation to maintain adequate resources, in connection with the STI loan obligation, could pressure the rating. CREDIT PROFILE The corporation is a direct support organization of the university created in 2003 and exists solely to manage the design and construction of housing, student union, and parking facilities and issue related debt on behalf of the university. Management and governance of the corporation and the university remains closely intertwined. The corporation, upon completion of a project, transfers the completed building to the university to manage under the operating lease. Accordingly, the university makes lease payments to the corporation for a leased facility in an amount equal to debt service on the respective housing, parking, or student union bond issue. Once the debt issued to finance the facility has been paid, title and ownership are transferred back to the university. The university is a member of the state university system of Florida and was founded in 1991, admitting its initial student body in 1997, to provide undergraduate and graduate level education for the citizens of Southest Florida. Located in Fort Myers, Florida, the academic needs of this growing population have been a catalyst for academic program expansion and the construction of new facilities. The university currently offers 49 undergraduate and 30 graduate programs through five colleges. The headcount enrollment for fall 2014 was 14,469 students. Housing System Net revenues from the housing system generated 1.61 times (x) debt service coverage in fiscal 2014. Due to debt service for recent issues coming online, debt service is projected to increase 22.7% between fiscal 2014 and fiscal 2016. Despite the significant increase, debt service coverage is projected to average a satisfactory 1.45x from fiscal 2015 to 2017 as a result of gains in enrollment, which subsequently drives demand for on-campus housing. FGCU's housing system (rated 'A+') has benefited from fall occupancy of over 99% for the past three academic years, with strong average academic year occupancy of about 97%. For fall 2014, a limited number of students were placed on a wait list for on-campus housing compared to over 200 in fall 2010, reflecting a modest slowdown in demand for housing as new facilities come online. The limited off-campus housing opportunities and strong demand have driven the aggressive building schedule that has characterized the period from 2007 to the present. Combined housing system debt outstanding is reduced to $188.8 million, and the portion of housing related variable rate demand bonds outstanding (VRDB) ($19.3 million) is reduced to 10% of total debt outstanding in fiscal 2015, as existing bonds amortize. Fitch views the greater percentage of fixed-rate bonds favorably. Parking System FGCU's parking system (rated 'A+') is supported by a universally applied fee of $8.50 per credit hour assessed to all university students, a notable strength of the security. Debt service coverage for the parking system was strong at 1.99x for fiscal 2014. Similarly to the housing system, debt service increased by 12.3% in fiscal 2014 as debt service from prior issues layers on to the existing obligations, but expected to level out for the projected period (2015-2017). Despite the upswing in the prior year, projections indicate adequate average annual debt service coverage of 1.84x for the projected period. Parking system debt totals $20.5 million, of which 34.7% is variable rate. FGCU does not plan to issue additional parking system capital improvement bonds in the near term. Student Union System Student union bonds (rated 'A') are supported by the net revenues of the university's book store and food service enterprise. The one-notch distinction between the housing/parking bonds and the student union bonds reflects the relatively limited nature of the student union pledged revenue stream, which would be more immediately impacted by an increasingly competitive environment or unforeseen variability in enrollment. However, the lack of additional debt plans and strong debt service coverage of 6.75x in fiscal 2014 partially mitigates the somewhat weaker revenue stream. Budgeted projections for student union debt indicate lower but healthy average debt service coverage of 5.2x from fiscal 2015 to fiscal 2017, accounting for the variable rate interest component. The student union's $5.3 million in outstanding debt is 100% variable rate. The risks associated with the VRDBs are somewhat offset by the high demand and strong historical coverage levels, as well as lack of additional planned student union debt. Further, Fitch views favorably FGCU's conservative budgeting for all variable rate debt, which includes a 4% interest rate assumption. University Operations At the university, solid annual enrollment growth has averaged 4.7% per year over the past five years (fall 2010-2014), resulting in an average annual increase in net tuition and fees of 13.3% over the same period. Strong growth in admission applications, surpassing last year's record high, generated 2.8% enrollment growth over the last year to 14,469 students in fall 2014. Fitch notes that this enrollment growth is slightly lower than projections of 5% provided in prior years due to the state's mandate to limit enrollment growth to 2.5% annually. Growth in student generated revenues from enrollment have helped offset the reduction in state appropriations in recent years; however, state support increased about 41% in fiscal 2014 to 59.6% million reversing this trend. In fiscal 2014, state appropriations represent 30.4% of operating revenues, up from 24.4% in fiscal 2013, which is still lower than prior years (43.4% in fiscal 2008). Fitch views favorably the increasing state support given the institutions requirement to freeze tuition and limit enrollment growth which could pressure operations. The university's pricing has limited flexibility as it requires legislative approval, and tuition in Florida is among the lowest in the nation. Tuition at FGCU is in the mid-range compared to the other public institutions in Florida. Despite this limited pricing flexibility and enrollment growth, the university's operating margin was positive in fiscal 2014 (0.6%) after two years of deficits. In addition, limited balance sheet resources improved, with available funds (defined by Fitch as cash and investments not permanently restricted) increasing to $82.5 million, covering 42.3% of expenses and 36.5% of total pro forma debt, notably a modest improvement compared to 21.6% and 13.7%, respectively, in fiscal 2010. Additionally, the corporation maintains an unrestricted fund balance of about $18.8 million, a portion of which has recently been made board restricted for debt service reserves ($5.6 million) on various series of bonds which are not legally required under the bond indenture. Management has indicated that about $13.3 million remains unrestricted and could be used for any purpose with board approval, including repayment of the STI loan, if necessary. State capital appropriations are expected to remain very limited in the near term for new construction. The university does not budget for depreciation, therefore, without additional capital support, operations may be further pressured. However, the university expects funding for deferred maintenance for existing buildings to support operations will continue to be funded by the state. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria', (June 2014); --'College and University Rating Criteria', (May 2014); --'Fitch Places Florida Gulf Coast University Financing Corp's Revs on Rating Watch Negative', (September 2014). Applicable Criteria and Related Research: Revenue-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012 U.S. College and University Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980988 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. |
