NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'AA-' rating on approximately $403.4 million of outstanding University of Akron (UA, or the university) general receipts bonds and approximately $33.8 million of outstanding Summit County Port Authority (SCPA) student housing lease revenue bonds, series 2011 (University of Akron student housing project).
The Rating Outlook is Stable.
SECURITY
General receipts bonds are unsecured special obligations of UA payable from general receipts, which exclude state appropriations. Student housing lease revenue bonds are secured by a master lease agreement between UA and SCPA, with lease payments made by the university equal to annual debt service. Lease payments are general obligations of the university
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: UA's recent track record of positive to breakeven operating performance, adequate balance sheet liquidity, solid debt service coverage from operations and modest capital needs, support the 'AA-' rating. Counterbalancing credit factors include a moderately high debt burden and recently reduced levels of state funding.
PRESSURED OPERATIONS: A reduction in state general fund appropriations during fiscal 2012 following the end of federal stimulus funding resulted in a weakening of UA's operating performance to breakeven. This followed two consecutive years of solidly positive operating results in fiscal years 2010 and 2011.
HISTORICALLY STRONG DEMAND MODERATING: Following robust enrollment growth over the past several years, student headcount fell in fall 2012 due in part to tighter admissions standards implemented by the university; fall 2013 enrollment is expected to remain roughly flat with the fall 2012 level.
RATING SENSITIVITIES
ENROLLMENT TRENDS: Based on UA's somewhat high dependence on student generated revenues for a public institution (56.7% of fiscal 2012 operating revenues), rating stability is predicated on the university restoring and maintaining enrollment at or near historical levels.
STATE FUNDING: While state funding appears to have stabilized, albeit at reduced level, further cuts, while not anticipated at this time, could pressure the university's operating performance and put downward pressure on the rating and/or Outlook.
CREDIT PROFILE
Originally founded in 1870, UA is one of 13 public universities in the state of Ohio (general obligation bonds rated 'AA+' with a Stable Outlook by Fitch). In addition to its main 218-acre Akron campus, which comprises nine degree-granting colleges, UA has five other locations throughout northeast Ohio.
Driven by healthy enrollment growth over the past several years and prudent fiscal management, UA's operating performance improved markedly in fiscal years 2010 and 2011, resulting in solidly positive operating margins of 3.8% and 4.7%, respectively. The operating margin is calculated inclusive of annual distributions from UA's two legally separate but related foundations. Following the end of federal stimulus funding, the university's general fund appropriations declined by about $15 million in fiscal 2012, resulting in a weakening of its operating margin to 0.4%, or roughly breakeven. While down, the margin matched the five-year average, also 0.4%, and was in line with Fitch's expectation of at least a breakeven level of operating performance for public colleges and universities.
A more than anticipated drop in fall 2012 enrollment pressured UA's revenues during fiscal 2013, although with no further state cuts and continued expense management, the university anticipates a year-end operating result similar to or slightly better than the fiscal 2012 level. UA's revenue base is moderately diverse, although student-generated revenues (tuition, fees, and auxiliary revenues) and state appropriations represent its two largest funding sources. State funding is expected to increase slightly during the next biennium (2014-2015), although the state revised its funding formula to focus on performance based outcomes as an incentive for institutions to improve degree completion. Fitch will monitor UA's progress towards improving this metric and its impact on the university's funding.
Headcount and full-time equivalent (FTE) enrollment grew at a healthy average annual rate of about 5% from fall 2007 to fall 2011, before slipping modestly in fall 2012. Management attributes the fall 2012 drop, which was part intentional, to tighter admissions standards the university implemented to help boost student retention and graduation rates. Fall 2012 headcount and FTE enrollment totaled 28,771 and 22,430, respectively. While this represented about a 3% decline from fall 2011, Fitch notes favorably that enrollment is up around 11% over the past five enrollment cycles. While enrollment is anticipated to remain flat for fall 2013, management expects modest growth over time. Based on UA's moderately high dependence on student-generated revenues, the university's ability to restore and maintain enrollment at or near historical levels is critical to rating stability.
The university's balance sheet resources have remained fairly stable over the past few years and provide a modest financial cushion. Available funds (cash and investments less nonexpendable restricted net assets) totaled $214.4 million as of June 30, 2012. Available funds covered fiscal 2012 operating expenses ($495 million) and debt ($420.4 million) by an adequate 43.3% and 51%, respectively. UA is also in the midst of a comprehensive, $1 billion fundraising campaign, portions of which are designated for endowment growth. The university's sound fundraising ability is viewed favorably and progress towards the campaign's goal should help boost liquidity levels. To date, $881 million has been raised in cash and pledges.
UA's debt burden is moderately high. Pro forma maximum annual debt service (MADS) of about $34.3 million would consume 6.9% of fiscal 2012 operating revenues ($496.9 million). Fitch considers a debt burden over 10% as high. Concern over the university's debt burden is offset by its consistently solid debt service coverage from net operating income. Fiscal 2012 net operating income of $60.1 million covered MADS by a solid 1.8x. Following the opening of a new residence hall in fall 2012, which was funded with UA's series 2011 bonds, the university's forward capital needs remain modest with no new direct debt plans at this time. However, it is contemplating refunding outstanding debt in the near term depending on market conditions.
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 24, 2012);
--'University of Akron, Ohio' (April 21, 2011);
--'Fitch Rates Univ of Akron, OH's 2011 Lease Revs 'AA-'; Outlook Stable' (April 15, 2011);
--'Fitch Rates Ohio Treasurer of State's $61MM Bonds 'AA'; Outlook Stable' (March 11, 2013).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679152
University of Akron, Ohio
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=621752
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