TEXT-Fitch affirms Midland University, Neb. revs at 'B'
Feb 21 - Fitch Ratings affirms approximately $17.5 million of education facility revenue bonds issued by the Nebraska Educational Finance Authority on behalf of Midland University (MU or the university), formerly known as Midland Lutheran College, at 'B'. The Rating Outlook is revised to Stable from Negative SECURITY The bonds are a general obligation of the college, additionally secured by a cash-funded debt service reserve. KEY RATING DRIVERS IMPROVED OPERATIONS AND ENROLLMENT: The revision of the Outlook to Stable reflects recent enrollment growth, now the highest in university history, and a recovering operating profile that leverages ongoing expense controls, successful fund raising for unrestricted gifts and completion of a debt reduction initiative, all of which helped generate a sizeable surplus for fiscal 2012. WEAK LIQUIDITY LIMITS FLEXIBILITY: MU's financial cushion declined further for fiscal 2012 as a result of continued operational support from its already modest endowment. While MU anticipates additional non-recurring cash infusions to improve liquidity in the coming year, the university will require multiple years of positive operating results to achieve a measurable level of unrestricted financial resources. RECOVERY PLAN ONGOING: The university's strategy for rebuilding balance sheet resources over a period of three years via enrollment growth appears challenging due to loan payoffs and endowment support for operations. However, marked improvements in fiscal 2012 operations and growing demand have marginally improved its prospects. RATING SENSITIVITIES DEMONSTRATED FINANCIAL IMPROVEMENT: Continued improvement in financial metrics resulting in break even or better margins as a result of enrollment growth and without the benefit of non-recurring gifts and contributions is fundamental to near term rating improvement. CREDIT PROFILE OPERATING MARGINS TURNAROUND MU's fiscal 2012 margin improved to 14% inclusive of unrestricted contributions of nearly $7 million. A combination of higher tuition and fees along with non-recurring gifts resulted in a net excess of nearly $3mm not including the partial forgiveness of an outstanding note. Fitch expects improved results as unrestricted contributions materialize and expense controls continue to reduce operating deficits. Based on ongoing operational rebalancing efforts, MU projects break-even operations on a cash basis, by fiscal 2014. Noting the magnitude of recovery accomplished by MU for fiscal 2012, growing enrollment levels in fall 2012 and expected demand for the coming year, MU's financial performance should stabilize within the specified timeline. Positive margins and predictability in future operations for MU would support rating improvement. MU continues to honor relatively high tuition subsidies/ discounts (61.9% in 2011, down to 54.5% in 2012) for transfer students from Dana College (Dana) (which closed down in 2010) but overall discounting will diminish as these students graduate. Discounts are expected to normalize to around 50%, a level Fitch still considers quite high. The university continues to enact regular increases in tuition (4.8% for fiscal 2013) and room and board charges (4.9% for fiscal 2013) which partially offset the aforementioned discounting levels. ENROLLMENT GROWTH BODES POSITIVE Demand trends for the university are growing. MU enrolled 436 new students in fall of 2012, the highest in the university's history on the heels of fall 2011 which experienced one of the largest incoming freshmen class sizes (366 students) in five years. The university expects to have a total enrollment figure of 1,300 (currently 1,126) by fall of 2014 which Fitch views as reasonable given robust growth in 2011 and 2012. Enhanced offerings and aggressive marketing are driving demand, including a new MBA program in spring of 2013, a successful RN to BSN program for nursing and successful undergraduate recruitment efforts. MU's ability to realize enrollment growth and maintain stable enrollment levels is critical to improving its credit profile. WEAK FINANCIAL CUSHION MU's rating remains hinged to its diluted liquidity profile. Available funds, defined as unrestricted cash and investments, were calculated to produce a deficit of $4.7 million at May 31, 2012, declining further from negative $1.5 million at May 31, 2011. However, the success noted by MU in gaining unrestricted gifts during fiscal 2012 is indicative of school support embedded in the local and financial community. Additional outstanding pledges will be realized in fiscal 2013 which should further diminish reliance on the endowment for operational support. MU borrowed $1.5 million from its permanently restricted endowment pool in fiscal 2013, leaving a modest relative balance of $6.8 million. The repayment of these internally designated loans (approximately $7.9mm) will commence in fiscal 2014 from all available sources of revenue. Fitch views this low level of operating flexibility as a key vulnerability. HIGH DEBT BURDEN MU's long-term debt, as of December 2012, was reduced as a result of loan forgiveness and subsequent note payoff in June of 2012. Outstanding debt includes approximately $17.5 million of fixed-rate bonds and $0.5million of notes and capitalized leases. The lender of MU's largest note ($3.6 million) forgave half of the note in fiscal 2012, reducing the outstanding payable to $1.8 million, which was paid off in early fiscal 2013. While Fitch notes the debt reduction favorably, the debt burden remains high. For fiscal 2012, annual debt service of $2.1 million amounted to nearly 9.4% of unrestricted operating revenue, down from 13.9% previously. Coverage of debt from net income for fiscal 2012 was more than adequate at 2.6x. Fitch notes that fiscal 2012 net income available for debt service was admittedly higher due to the receipt of non-recurring gifts and expects coverage to decline to a sustainable level in future years. Midland University, re-branded in 2010 from Midland Lutheran College, is a private, co-educational liberal arts college located in Fremont, Nebraska, approximately 35 miles northwest of Omaha. The college primarily serves undergraduate students, and expanded its masters programs in education and professional accounting to include business administration, in fall of 2012. MU is affiliated with the Evangelical Lutheran Church in America. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria' (June 12, 2012); --'College and University Rating Criteria'(May 25, 2012); --'Fitch Affirms Midland Lutheran College, NE's Revs at 'B'; Outlook Negative' (Sept. 12, 2012). For information on Build America Bonds, visit www.fitchratings.com/BABs. Applicable Criteria and Related Research: Revenue-Supported Rating Criteria U.S. College and University Rating Criteria