NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to $58 million of Rhode Island Health and Educational Building Corporation higher education facilities revenue refunding bonds to be issued on behalf of Roger Williams University (RWU).
The series 2013 bonds are expected to be sold via negotiation on or about the week of June 24th, 2013. Proceeds of the bonds will be used to refund the series 2003 and 2008B bonds and pay certain issuance costs.
The Rating Outlook is Stable.
SECURITY
The bonds constitute a general obligation of the university. Additional security is provided by a lien on and security interest in certain mortgaged property.
KEY RATING DRIVERS
Stable Credit Characteristics: The 'BBB' rating primarily reflects the consistent generation of positive operating margins on a full accrual basis and adequate financial resources relative to operating expenses and long-term debt, partially offsetting concerns regarding a high debt burden, very high reliance on student-generated revenues and limited fundraising history.
Significant Revenue Concentration: Typical of many private higher education institutions, the university's high dependency on student-generated revenues (93.8% of total unrestricted operating revenues in fiscal 2012) exposes RWU to unexpected, unfavorable shifts in student headcount and demand patterns.
Enrollment Focused Initiative: RWU's student headcount is stable. However the university's matriculation rates remain weak. In an effort to improve enrollment trends the university initiated a program called 'Affordable Excellence' which is aimed at controlling rising educational costs. This program, if successful, is expected to increase enrollment levels going forward.
High Debt Burden: Annual debt service of approximately $15.3 million including all university debt consumes a high 9.7% of fiscal 2012 unrestricted operating revenues but this concern is mitigated by the university's five-year average debt service coverage in excess of 1.5 times (x) and lack of additional debt.
RATING SENSITIVITIES
Concentrated Revenue Base: RWU's significant reliance on student-generated revenues and limited demand flexibility increase the vulnerability of the university's financial performance to fluctuations in enrollment.
Debt Issuance: While not anticipated at the present time, the issuance of additional debt without a commensurate increase in financial resources could yield negative rating pressure.
CREDIT PROFILE
Accredited by the New England Association of Schools and Colleges, RWU is a private, non-denominational, co-educational university of liberal arts and professional programs offering degrees in more than 30 major fields. Chartered as a two year college in 1956, RWU is located in Bristol, RI. The university's main campus, comprising 143 acres of waterfront property, is located approximately 15 miles from both Providence and Newport and 40 miles from Boston. Fall 2012 enrollment accounted for nearly 5,300 students consisting of undergraduate, graduate and law school students.
POSITIVE OPERATING MARGINS TEMPERED BY LIMITED REVENUE FLEXIBILITY
The 'BBB' rating is anchored by RWU's consistently positive margins. The university's operating margin has averaged 4.8% over the past five years, reflecting enrollment stability as well as conservative and prudent financial management. Regular tuition increases equating to an average 4.5%, in combination with active expense management, have helped drive annual operating surpluses. Fiscal 2013 operations based on unaudited interim results are expected to generate another positive margin. Fitch considers RWU's operating consistency favorably.
Revenue diversity is limited with student derived tuition and fees accounting for nearly 94% of total revenues, however this revenue concentration is typical for similarly sized private institutions. RWU's effort to improve enrollment and enact its Affordable Excellence initiative contemplates a slight uptick in discounting, a tuition freeze and guaranteed tuition rate for incoming students in fall of 2013. These measures without enrollment increases will pressure growth in net tuition revenues. The university's success in expanding its continuing education and certification in conjunction with the aforementioned initiatives will be necessary to sustain stable operations. Fitch credits the management team's demonstrated ability to curb many variable expenses and manage fixed costs if operating results vary materially from plan.
STABLE ENROLLMENT ANCHORED BY STRONG RETENTION RATES
RWU's headcount for fall 2012 totaled 4,769 students, excluding the law school, the second highest count in the past five years. However, a low 15.5% undergraduate matriculation rate for fall 2012 is indicative of the university's perennially lower conversion rate which averaged 16.2% over the past five years. Management noted that the guaranteed tuition program was established late in the application and enrollment process last year. Overall demand trends are positive for the university with current deposits for fall 2013 exceeding the previous year. Retention rates for first-to-second year students averaged about 81% over the past five years, which Fitch notes favorably.
ADEQUATE BALANCE SHEET RESOURCES
Available funds, defined by Fitch as cash and investments not permanently restricted, totaled $66.3 million as of June 30, 2012. The university's financial cushion covered fiscal 2012 operating expenses and pro-forma long-term debt by a sound 43.6% and 42%, respectively. RWU's endowment of $72.9 million is mostly unrestricted and managed by the investment committee of the Board assisted by an external investment advisor. The university has increased its allocation to alternative investments from about 23% to 28% as of fiscal year end 2012, which Fitch considers moderately aggressive for the rating category. RWU's endowment distribution policy is equal to 5% of a trailing 12 quarter average of the unrestricted endowment's total asset value and the university has taken these disbursements annually for operational use. Fitch, however, does note, favorably, that RWU operations remain positive without the use of the draw.
COVERAGE OFFSETS DEBT BURDEN
RWU's pro-forma maximum annual debt service (MADS) associated with long term bonded debt declines by approximately $400,000 to $10.9 million post issuance and represents 6.9% unrestricted fiscal 2012 operating revenues. Aggregate long term debt outstanding, including open lines of credit, non-cancellable operating leases and capital leases, totals $157.8 million. The associated DS on all debt is equal to $15.3mm and comprises a high debt burden of 9.7% per Fitch's criteria for a BBB rated private college or university. Offsetting this leverage is better than adequate coverage levels. DS coverage from operations averaged over 1.5x in the past five years.
The series 2013 fixed rate bonds provide increased certainty in the annual budgeting process as they defease variable rate debt and refund higher interest rate obligations. There is no debt service reserve fund associated with the 2013 bonds as the existing reserve for the 2003 bonds will be used to reduce debt outstanding. Although coverage levels are somewhat weaker than typically noted at the BBB level comfort is provided due to a declining amortization schedule and reduced debt costs.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria' (June 6, 2013);
--'U.S. College and University Rating Criteria' (May 10, 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793582
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