TEXT - Fitch affirms California's University of Redlands revs
Jan 8 - Fitch Ratings affirms the 'BBB' rating on $72.3 million California Educational Facilities Authority revenue bonds issued on behalf of University of Redlands (UR). The Rating Outlook is Stable. SECURITY The bonds are an unsecured general obligation of UR. KEY RATING DRIVERS RATING AFFIRMED: The 'BBB' rating reflects the university's generally growing enrollment levels and modest balance sheet cushion offset by operating margins that reversed course in the past fiscal cycle. INCONSISTENT OPERATING RESULTS: UR generated weaker than forecasted operating margins for fiscal 2012 due to shortfalls in certain programs and expenses outpacing revenue growth. Fitch expects active management of expenses in the current year to improve margins going forward. FINANCIAL STABILIZATION PLAN EXTENDED: UR revised its four year strategic financial plan to five years due to weaker than expected operations in fiscal 2012 and general economic stress. Fitch notes recovery, culminating in balanced operations, is predicated upon the university's ability to align enrollment growth with associated expenses. ENROLLMENT GROWTH EXPECTED TO BOLSTER OPERATIONS: Enrollment has grown to the highest level in a decade as new programs have been added. Fitch expects that a continued positive demand trend will lead to improvement in UR's operating margin post fiscal 2013. WHAT COULD TRIGGER A RATING ACTION INABILITY TO ALIGN DEMAND AND OPERATIONS: UR's continued inability to utilize growing enrollment to demonstrably improve operating results will pressure the current rating. CREDIT PROFILE In fiscal 2012, UR's operating margin, negative 4.8%, reversed the improvement reflected in the two previous years. Fiscal 2012 results were weaker due to lower than anticipated revenues from two programs lines (business and education) and an increase in personnel related expenditures. The university's long standing structural mismatch of revenues and expenditures has generated a negative operating margin for eight of the last 10 years. The rating will be pressured if the margin continues to deteriorate. Despite the aforementioned, the university continues to generate a cash-basis surplus. In fiscal 2012 net income available from operations provided adequate coverage of 1.5 times (x) average annual debt service (AADS). AADS coverage and the moderate debt burden (4.9%) are in line with other private colleges and universities rated in the 'BBB' category by Fitch. UR's management team is committed to a five year strategic financial plan that is expected to achieve break even to increasingly positive cash basis margins by fiscal 2014. Fitch expects improvement in GAAP based margins during the same time frame. The plan includes expense reduction and enrollment targets which have generally improved since implementation in fiscal 2010. Fitch notes consistent enrollment growth measured by full time equivalent (FTE) increases of 5% and 6.5% for fiscal 2011 and 2012, respectively, has failed to generate a material improvement in operations. The university must demonstrate the ability to align growth in enrollment along with financial resources by generating discernible improvement in margins going forward. Demand for UR has improved over time. Considering UR's heavy reliance (90.3%) on student generated revenues, enrollment management is key to the university's financial success. Enrollment levels measured both by FTE (4,190) and headcount (4,956) are at a 10-year high. Demand for the college of arts and sciences (CAS) is growing, however, applications have declined for the school of business (business) and school of education (education). Business is instituting scholarship programs to induce demand and expanding their recruitment to direct mail for inquiry generation. Education continues to suffer from pressured school district funding dampening job opportunities in the teaching profession. However, two new academic offerings have experienced significant demand and expanding classes in those disciplines is expected to increase student interest. The new school of continuing studies (SCS), launched in spring 2011 is expected to increase revenues for its non-degree granting programs. In addition to certificate and continuing education programs, SCS will, this summer, offer core requirement arts and science classes to attract students from larger public and community college institutions. UR expects growth in revenues from these classes to impact the fiscal 2014 operations. Fitch notes that management has adjusted its budgetary expectations for fiscal 2013 based on fall 2012 enrollment and expects an improvement in the margin. Liquidity remains stable. Fiscal 2012 available funds (unrestricted cash and investments) declined slightly (from $40.3 million in 2011) to $38.6 million, still providing moderate coverage of operating expenses (34.5%) and total debt (44.8%). These levels are within the range of the other 'BBB' category private colleges and universities, however marked decline of this metric could cause rating pressure. UR has roughly $86.2 million in aggregate debt outstanding of which $72.3 million is bonded debt and $7.9 million is bank debt on parity with the bonds. The university refinanced outstanding bank debt of $5.2 million in fiscal 2012 and incurred new debt for a construction project in the amount of $2.5 million in fiscal 2013. Associated maximum annual debt service (MADS) comprises 11.3% of unrestricted operating revenues, which while slightly high, is acceptable for the rating category. While the university has multiple foregoing capital investment needs, UR expects to fund them internally or from gifts and contributions. Fitch expects any future debt incurrence to be accompanied with a level of resources sufficient for its repayment. Originally founded in 1907 by members of the American Baptist Church, UR is a non-sectarian private university. In addition to its main campus in Redlands, California, the university also maintains seven satellite locations used by the school of business, the school of education, and the new school of continuing studies.
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