NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following Montgomery County Revenue Authority (MCRA) bonds issued on behalf of Montgomery College (MC, or the college):
--$7.11 million tax-exempt lease revenue bonds (Montgomery College Goldenrod Building Acquisition) series 2011A;
--$8.84 million taxable lease revenue bonds (Montgomery College Goldenrod Building Acquisition) series 2011 B.
A competitive sale is expected on or about the week of July 18. Proceeds of the bonds will be used to exercise a purchase option on a building currently leased by the college. The county will continue to lease the second floor of the facility for a business incubator targeted at emerging life science and high technology start-up firms. The ground floor, which the college will occupy, will provide academic space and serve as the home of the English department, one of MC's most popular instructional disciplines. Bond proceeds will also be used to pay costs of issuance and fund capitalized interest between the bond closing and the transaction closing.
In addition, Fitch affirms the 'AA' rating on the following MCRA bonds:
--$16.825 million lease revenue bonds, series 2008 A;
--$29.31 million lease revenue bonds, series 2005 A.
The Rating Outlook is Stable.
RATING RATIONALE:
--The 'AA' rating is underpinned by MC's vital role in the Montgomery County, MD (the county; rated 'AAA' by Fitch) economy, strong and consistent support from the state of Maryland (the state, also rated 'AAA'), increasing enrollment and adequate liquidity.
--A history of negative operating performance, heavy dependence on state and county appropriations to drive the operating budget and additional capital plans somewhat offset the aforementioned factors.
--Because the majority of MC's capital projects have been funded by the state and county, the college's debt burden remains low, with adequate maximum annual debt service (MADS) coverage from the dedicated revenues.
KEY RATING DRIVERS:
--Incremental progress in moving toward balanced operations in the near to intermediate term;
--Maintenance of balance sheet resources at or above current levels;
--Stable enrollment levels to provide revenues sufficient to cover debt service on the college's various obligations;
--Continued support from the county and state to fund operations and capital needs.
SECURITY:
The series 2011 A and B bonds are secured by general obligation of the college. The series 2008 A are secured by transportation fee revenues, and the series 2005 A bonds are secured by facility fee revenues.
CREDIT SUMMARY:
The college fills an integral position in the higher education system of the state and the economic operation of the county. Local support from the state and county is clearly evidenced from the continued increase in appropriations to the college, which have increased year-over-year despite the stressed economic conditions affecting state budgets nationwide. Maintenance of good working relationships with the state and county are crucial to the college's credit stability, as state and county appropriations fund an average of 58.2% of MC's operating budget annually - more than double student-generated revenues (30.1%). The state and county have also provided significant capital appropriations (totaling $197.8 million over the past five years) to mitigate MC's space deficiency, which has contributed to a very low debt burden. Pro forma MADS, which totals $4.6 million due in fiscal 2028, on all of MC's outstanding bonds represented just 1.7% of fiscal 2010 revenues.
The college's overall operations continue to provide adequate coverage of pro forma MADS (1.1 times [x] in fiscal 2010). However, coverage is somewhat understated because debt service on the series 2011 A and B bonds is expected to be approximately equal to annual lease payments currently paid for use of the facility that will be purchased with bond proceeds. In addition, future revenues from the county's lease payments (guaranteed for the term of the bonds) are expected to offset approximately 50% of combined debt service. The mandatory fees pledged to the series 2005 bonds ($5.00 per credit hour facilities fee) and the series 2008 A bonds ($4.00 per credit hour transportation fee) are anticipated to generate 1.14x coverage and 1.79x coverage of actual debt service on the respective obligations in fiscal 2011.
Despite a stable and increasing revenue base, the college has historically generated annual operating deficits as a result of capital spending to support facilities needs and annual funding of other post-employment benefit (OPEB) liabilities. MC's operating margin has averaged -3.0% over the past five fiscal years. Concerns regarding this trend are somewhat offset by the impact of annual OPEB contributions, excluding which results would have been positive in fiscal 2009 and approximately break-even in fiscal 2010. The college expects fiscal 2011 results to be comparable to fiscal 2010. To maintain the 'AA' rating, Fitch expects sustained improvements in the college's operating margin, inclusive of the annually required OPEB contributions.
The college's available funds, defined by Fitch as cash and investments not permanently restricted, have been somewhat volatile as a result of capital spending, the overall market downturn, and continued negative operating performance. Over the past three fiscal years, available funds have increased a total of 38.9% to $71.2 million, just shy of the historic high of $72.8 million in fiscal 2007. Despite the recent improvements, available funds represent just 25.8% of total operating expenses, somewhat low for the 'AA' rating. Due to the college's low debt burden, available funds represent a more robust 112.9% of total pro forma debt.
MC is a two-year academic institution offering 75 associate degree programs and 60 certificate programs. In operation for more than 60 years, it is the second largest higher education institution in the state, after the University System of Maryland (tuition revenue bonds rated 'AA+'). The college operates three campuses located throughout the county - Takoma Park/Silver Spring, Rockville, and Germantown. Enrollment at the college has increased 20% since fall 2006, reaching 21,866 on an FTE basis in fall 2010.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', dated Oct. 8, 2010.
'College and University Rating Criteria', dated Dec. 29, 2009.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493170
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