TEXT - Fitch rates South Carolina's Coastal Carolina Univ higher ed revs
Jan 23 - Fitch Ratings assigns an 'A+' rating to approximately $50.9 million of higher education revenue bonds, series 2013 (the bonds) issued by Coastal Carolina University (CCU). The bonds are expected to sell competitively the week of Feb. 4th. Bond proceeds will be used to finance the construction of the first phase of a new on-campus student housing facility (the project), fund capitalized interest, and pay costs of issuance. The Rating Outlook is Stable. SECURITY The bonds are secured by a pledge of all revenues of the university on a parity basis with outstanding revenue bonds. The pledged revenues exclude state appropriations and tuition revenues pledged to general obligation (GO) state institution bonds (rated 'AAA' by Fitch). RATING SENSITIVITY/ RATING DRIVERS STABLE CREDIT ATTRIBUTES: CCU's 'A+' rating reflects consistently positive operating results, stable and growing enrollment trends and adequate balance sheet liquidity. These strengths are offset by an atypically high reliance on student revenues, an increasing pro forma debt burden and the expectation of future debt issuance. STUDENT DEMAND DRIVES PERFORMANCE: Enrollment has increased steadily over the years as demand has remained strong from both in-state and out-of-state applicants. The university's revenue mix benefits from out-of-state tuition levels which are instrumental in generating consistently strong margins. HIGH DEBT BURDEN MANAGEABLE: CCU's operating history as an independent state school is limited and, in the course of maturing, will require on-going investment in facilities and programs, portions of which are typically debt-financed. While expected student housing related issuance will increase the pro forma debt burden, historical coverage derived from operations is adequate at 1.7x. TUITION RELIANCE OFFSETS STATE SUPPORT: CCU's revenue dependency on state appropriations (state of South Carolina GO bonds rated 'AAA') declined to 5.8% in fiscal 2012. The university's success in managing reductions in funding with enrollment growth and associated tuition and fees causes a high reliance (72.2% of revenues) on student-generated revenues. CREDIT PROFILE: ENROLLMENT GROWTH DRIVES HOUSING NEED Headcount, as a result of sustained demand, has increased over the past five years. Fall 2012 headcount totaled 9,335 students, an increase of 22% from 7,677 in fall of 2008. FTEs increased to 8,859, from 7,178 (23% growth) during the same time. Currently, 38% of the total student population resides on campus; freshmen and sophomores are required to live on campus. Based on historical enrollment growth as an indicator for student housing demand, CCU has ascertained there will be a need for additional beds by fall of 2015. Therefore the university is undertaking the project, which is intended to provide additional capacity by fall 2015. The university's acceptance and matriculation rates averaged 72.5% and 29.7%, over the past five years, respectively. CCU's retention rate for freshman to sophomore, over the same time period, declined to 60%. As a result, CCU has begun providing student services that are designed to support integration into college level work and academic performance in order to improve retention rates going forward. Fitch considers the university's overall demand profile robust enough to withstand a low retention rate for the near term. Fitch also notes that the university's traditional student mix represents 46% of out-of-state students (above average for a public institution) and acknowledges the favorable effect of this mix on CCU's financial performance. HEALTHY OPERATING MARGINS CCU's ability to generate consistent operating surpluses is reflected by an average operating margin of 10.6% from fiscal 2008-2012. During the same time, the university's relative affordability versus in-state peers enabled regular rate increases which, along with enrollment growth, have produced adequate cash flow from operations. While state funding levels for the university have declined over the years, CCU's operational viability is supported by a property tax millage within Horry County (rated 'AA+') and by a portion of county-wide local option sales tax revenue collected through 2024. The aforementioned positives are balanced by the university's 72.2% reliance on tuition, fees and auxiliary revenues for its operations (relatively high for a public institution). LIQUIDITY ANCHORED BY OPERATIONS Available funds, calculated as cash and investments, less any restricted funds, totaled $89 million in fiscal 2012. Fitch notes that consistency in operating surpluses has enabled the maintenance of balance sheet resources despite ongoing construction and improvements for the university. For fiscal 2012, available funds represented 62.9% of operating expenses and 65.1% of pro forma debt. The university's resources are adequate for the rating category, tempered, however, by Fitch's expectation of future capital expenditures for projects included in CCU's long-term master plan. LEVERAGE EXPECTED TO INCREASE The bonds are secured by pledged revenues which will eventually exclude fees derived from athletic admissions and special athletics. CCU's revenue-backed debt will total $74 million, post issuance. Fitch only rates the current bond issue but includes all outstanding debt (including revenue bonds of approximately $19 million) in debt calculations. Including GO state institution bonds secured by the state, total debt, post issuance will equal $136 million. The debt burden is above average for the rating level at 7%. The debt burden increases to 8.6% assuming the issuance of approximately $38 million in bonds, expected in 2014. The issuance of the additional debt is predicated upon student demand and housing need. Coverage of pro forma maximum annual debt service (MADS -$11.1 million) from pledged revenues, 2.1x, declines to an adequate 1.7x (MADS - $13.6 million) upon including the anticipated 2014 debt. While CCU does not have firm future debt plans aside from the student housing project, Fitch expects the university to require capital outlays to fulfill facilities needs under a master plan articulated in calendar 2011. Fitch expects that any additional debt and capital spending will be offset by a corresponding increase in resources sufficient for its repayment. CCU, located in Conway, near Myrtle Beach, SC, was founded in 1954 by Horry County citizens, as a two-year college under the College of Charleston. In 1958, benefitting from a tax levy referendum, CCU became a campus of the University of South Carolina system (rated 'AA', Stable Outlook) and subsequently started awarding four-year baccalaureate degrees in 1974. CCU became an independent state supported institution in 1993.