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
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
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.
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.
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
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