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.
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.
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
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.