NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' rating on $12.870 million of outstanding revenue bonds issued by the Colorado Educational and Cultural Facilities Authority on behalf of Northwest Nazarene University (NNU, or the university).
The Rating Outlook is Stable.
SECURITY
Revenue bonds are an unsecured, general obligation of NNU. Additional bondholder security is provided by a cash-funded reserve equal to maximum annual debt service (MADS).
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'BBB' rating reflects NNU's adequate financial cushion and improving operating performance, resulting from prudent budgeting practices. Counterbalancing factors include a moderately high debt burden and concentrated revenue base.
ADEQUATE FINANCIAL CUSHION: NNU's balance sheet resources relative to operating expenses remain adequate in fiscal 2012, falling slightly below fiscal 2011 levels, as management re-instituted policy-driven endowment spending, but still consistent with the 'BBB' rating category. Fitch views NNU's financial cushion relative to long-term debt as somewhat stronger providing a solid level of financial flexibility.
ANTICIPATED ENROLLMENT SOFTENING: NNU's enrollment declined as anticipated in fall 2012, but management's pro-active expense management is expected to mitigate the impact of declining student generated revenues in fiscal 2013. As seen historically, NNU has succeeded in growing student generated revenues despite enrollment fluctuations in previous years.
CONCENTRATED REVENUE BASE: A heavy reliance on student-generated revenues limits budgetary flexibility. However, NNU's improving operating performance in fiscal 2012 and history of generally positive operating results partly offset this concern.
RATING SENSITIVITY
MARGIN SHIFTS: A material increase or decrease in operating margin, which drives overall financial flexibility, could impact the rating.
ENROLLMENT STABILITY: NNU's rating is sensitive to material upward or downward shifts in enrollment given significant tuition dependence which drives operating performance.
CREDIT PROFILE
Founded in 1913, NNU is affiliated with the Nazarene Church and is a small, comprehensive university located on an 85-acre campus in the city of Nampa, Idaho, a suburb of Boise. The university serves the northwest region of the Church, which is comprised of nine states, including AK, ID, WA OR, MT, WY, CO, NV and UT, enrolling students from throughout the U.S. and multiple foreign territories.
IMPROVED OPERATIONS
The combined result of growing net tuition revenues and pro-active expense management enabled NNU to improve operations in fiscal 2012 to 1.9%, compared to fiscal 2011's 0.1% operating surplus. This improvement demonstrates a second year of material improvement over the 2.4% deficit generated in fiscal 2010. The university was able to limit expense growth in fiscal 2012 to 1.0% by cutting costs across all departmental budgets and reducing the size of its faculty through early retirement, natural attrition, performance-based terminations and holding positions vacant.
The university's year-to-date fiscal 2013 operating results indicate NNU is currently on track to further improve operating performance with a positive surplus expected at or above fiscal 2012 levels. Management initiated several new cost saving initiatives in fiscal 2013 to offset the enrollment decline in fall 2012, which was anticipated. Such initiatives include restructuring financial accounts and reporting systems, creating performance metrics, and scrutinizing department budgets to make expense reductions. Further, NNU continues to hold certain positions vacant. Fitch views positively management's ability to improve operations and grow net tuition revenues in spite of declining enrollment in fall 2012.
GROWING STUDENT GENERATED REVENUES
Growth in NNU's student-generated revenues, which provide a high 77.2% of total operating revenues, were integral to the operational improvements demonstrated in fiscal 2012. Full-time equivalent (FTE) enrollment growth of 5.2% in fall 2011, combined with approximately level tuition discounting, led to 5.7% growth in net tuition and fees in fiscal 2012. Based on year-to-date results, management expects the 2.1% anticipated decline in FTE enrollment in fall 2012 (due to a large incoming freshmen class in fall 2008) to be more than offset by additional cost-reductions and the resumption of full endowment spending allowable under the board policy (4.5%).
NNU's adopted fiscal 2014 budget reflects another operating surplus, based on conservative revenue projections and flat enrollment assumptions for fall 2013. NNU's new recruiting strategy, coupled with refined marketing efforts and the addition of new academic programs, traditional core full-time student enrollment is projected to grow 4% from 980 students in fall 2013 to 1,020 students in fall 2016. According to management, current residential and classroom capacity should allow NNU to add students without incurring increased costs. Fitch plans to continue monitoring NNU's enrollment environment going forward, and, importantly, the university's ability to maintain positive operations and grow student-generated revenues.
ADEQUATE FINANCIAL CUSHION
NNU's available funds (or cash and investments not permanently restricted) dropped 6.1%, or approximately $1.3 million, at fiscal year-end 2012 to $19.9 million, after increasing 11%, or $2.2 million in fiscal 2011. The increase in fiscal 2011 was assisted by the university's decision to withhold annual policy-driven spending for institutionally funded scholarships. The spending policy was re-instituted as planned in fiscal 2012 at 4.5%, which accounts for some of the decline. As a percentage of fiscal 2012 operating expenses, available funds provided an adequate cushion of 53.4%, and a stronger 147.9% of long-term debt. Both metrics continue to be consistent with the 'BBB' rating level.
MODERATELY HIGH DEBT BURDEN
NNU's pro-forma MADS to total unrestricted operating revenues remains moderately high at 6.6% due to the structure of the series 2005 bonds. A deferred principal amortization structure, results in a spike in MADS to $2.5 million in fiscal 2017. NNU's moderately high MADS burden is offset by improving MADS coverage of 1.4x, and aside from this one-year increase, debt service is approximately level, averaging $1.5 million annually through the final maturity of the series 2008 bonds (2023), reflecting a lower average annual debt service (AADS) burden of 3.9% and stronger AADS coverage of 2.4x.
Management is considering refinancing all outstanding debt to take advantage of desirable interest rates in early fiscal 2014. Because of the currently low cost of borrowing, NNU is also contemplating the issuance of a modestly sized private placement to finance $2-5 million in capital projects. There are no other debt plans at this time.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria' (June 12, 2012);
--'U.S. College and University Rating Criteria' (May 25, 2012);
--'Fitch Affirms Northwest Nazarene University (ID) Revs at 'BBB'; Outlook Stable', dated May 9, 2012.
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
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789717
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