Dec 17 - Fitch Ratings has upgraded the rating, to 'A-' from 'BBB+', on
approximately $164.6 million Volusia County Educational Facilities Authority, FL
(VCEFA) revenue and refunding bonds (Embry-Riddle Aeronautical University
(ERAU), Inc. project).
The Rating Outlook is revised to Stable from Positive.
The bonds are secured by a gross revenue pledge of ERAU. As additional security,
the university has granted a mortgage lien on its Daytona Beach campus.
KEY RATING DRIVERS
OVERALL STRENGTHENING MERITS UPGRADE: The upgrade to 'A-' reflects a history of
positive operations, supported by stable enrollment, low debt burden and growing
balance sheet resources. The aforementioned attributes are offset in part by a
high reliance on student derived revenues.
FUNDAMENTAL DEMAND STRENGTH: The university's international reputation within
aeronautical and aerospace engineering underpins stable to growing enrollment
PRUDENT FINANCIAL MANAGEMENT: ERAU's timely and consistent management of
operating fluctuations has enabled ongoing generation of operating surpluses
that provide strong pro forma debt service coverage and support liquidity
MANAGEABLE CAPITAL SPENDING PLANS: The university will continue to utilize a
portion of its internal resources, which it has significantly increased over the
past few years, to fund capital projects. Based on projected cash flows, Fitch
expects ERAU's balance sheet liquidity will remain relatively stable given the
university's strong performance trends and lack of additional debt plans.
The upgrade to 'A-' from 'BBB+' is indicative of consistently positive operating
performance, which has increased the university's overall financial flexibility.
Over the last five years, ERAU's operating margin has averaged 5.7%, never
dropping below 2.6%. The sustained track record of positive operations with
surpluses that supplement balance sheet resources and the stable to growing
headcount is consistent with Fitch's expectation for an 'A' category private
Further, ERAU's operating health has helped bolster its financial resource base
to a level consistent with the rating. Available funds (defined by Fitch as cash
and investments not permanently restricted) grew 80% from fiscal 2008 - fiscal
2012, reaching a record high in fiscal 2012 ($184.1 million). While available
funds provides adequate coverage (62%) of fiscal 2012 operating expenses ($296.8
million), which is consistent with Fitch's expectation for a 'BBB' rated private
institution, relative to leverage, available funds is a solid 112.7% of total
outstanding debt and more reflective of an 'A' rated private institution.
ERAU's moderately low debt burden of 3.7% with no additional debt plans, and
strong coverage of pro-forma debt service from net available income of 4.4x is
Fitch anticipates continued surpluses will be offset by the use of reserves to
fund capital projects. ERAU's five year-capital improvement plan includes
approximately $60 million for current major facilities projects, of which $38
million will be used to build a new arts and science building, and approximately
$97 million for projects pending approval, including a new student union.
ERAU's internal cash flow projections reflect a decrease in year-end cash
balances of $15.2 million and $7.9 million in fiscal years 2013 and 2014,
respectively; however, available funds is not expected to be significantly
impacted. Fitch will continue to monitor ERAU's ability to maintain relatively
consistent available funds to support stabilization in liquidity ratios.
ERAU relies heavily on student-generated revenues with enrollment growth in
recent years fueling financial gains. Despite flat FTE enrollment growth in fall
2012, between fall 2008 - 2012 total FTE's increased 6.8% (to 16,671, a new
record high) largely due to significant FTE growth (10%) at the Worldwide campus
WWC's students are largely military/veteran and WWC's growth is attributed to
improved program accessibility, targeting working adults and military personnel
in varied locations. Federal funding budget cuts for education stipends continue
to provide some concern but are offset by ERAU's demonstrated ability to adjust
expenses in line with reduced enrollment and maintain positive margin.
Further, Fitch views enrollment growth projections as aggressive but achievable
given ERAU's comparatively low cost and niche reputation. ERAU's tuition and
fees are the lowest in their peer group and ERAU's Board only adopted a 2%
increase in fall 2012, a level it plans to maintain in fiscal years 2013 - 2017.
Fitch anticipates flat enrollment in fall 2012 will be offset by modest tuition
increases enabling student-generated revenue growth and continued surpluses for
Overall, Fitch views ERAU's demand flexibility as relatively sound. Despite the
university's high undergraduate acceptance rates, generally more reflective of
lower rated institutions, the moderately high matriculation rate and low tuition
discounting rate, provide some revenue flexibility and are more in line with the
'A-' rating. Fitch views ERAU's unique niche and advanced job placement will
continue to drive demand and minimize student enrollment volatility.
ERAU was established in 1926 as an independent, non-profit, co-educational
university. It is the world's oldest and largest university specializing in
aviation and aerospace engineering and is accredited by the Southern Association
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);
--'U.S. College and University Rating Criteria' (May 25, 2012)
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria