Fitch Ratings affirms the 'BBB' rating on $75.5 million California Educational Facilities Authority revenue bonds issued on behalf of University of Redlands (UR).
The Rating Outlook is Stable.
The bonds are an unsecured general obligation of UR.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'BBB' rating reflects the university's improved, though still negative, GAAP operating margin; positive enrollment trends; and a still modest balance sheet cushion.
FINANCIAL STABILIZATION PLAN ON TRACK: UR is in the second year of a four-year strategic financial plan. Through continued careful expense management in fiscal 2011, the operating margin improved closer to breakeven for the second consecutive year.
ENROLLMENT GROWTH SHOULD BOLSTER OPERATIONS: In Fall 2011, the university's full-time equivalents (FTEs) grew in line with UR's strategic financial plan and operating budget. Fitch expects this will lead to continued gradual improvement in UR's operating margin for fiscal 2012.
IMPROVING, BUT LIMITED, FINANCIAL CUSHION: The university grew its available funds in fiscal 2011 due to its cash basis surplus and market gains. Coverage of operating expenses and debt remains adequate for the 'BBB' rating category.
WHAT COULD TRIGGER A RATING ACTION
CONTINUED IMPROVEMENT IN FINANCIAL PROFILE: Continued achievement of strategic financial plan targets resulting in enhanced credit stability through a breakeven to positive operating margin and growth in available funds.
In fiscal 2011, UR's operating margin reached negative 3.1%. While still negative, this was the second consecutive year of improvement. The university also continues to generate a cash-basis surplus as net income from operations provided adequate coverage of 2.1 times (x) average annual debt service (AADS). AADS coverage and the moderate debt burden (5%) are in line with other private colleges and universities rated in the 'BBB' category by Fitch.
The university's leadership remains committed to a multi-year strategic financial plan, which includes expense reduction and enrollment targets. Annual operating budgets reflect these goals. Robust growth of 5% in fall 2011 FTEs (excluding students in the new school of continuing studies) was generally in line with the targets (UR revised its reporting methodology for FTEs, and provided Fitch with historical data back through fall 2008 for comparative purposes).
Increased enrollment at the college of arts and sciences (CAS) and the school of business offset continued declines at the school of education. The education school (representing 11% of the university's fall 2011 FTEs) continues to suffer from pressured school district funding in California, which dampens demand in the teaching profession. Importantly, management appears to have adjusted its annual budgetary expectations to be line with actual enrollment.
During fiscal 2011, UR's available funds increased 33.7% to $40.6 million, providing moderate coverage of operating expenses (37.6%) and total debt (46.5%). These levels are within the range of other 'BBB' category private colleges and universities.
Upward rating movement will be contingent upon UR's ability to achieve a breakeven to positive GAAP margin by fiscal 2014, and continued improvement in the balance sheet cushion. The continued implementation of the university's strategic financial plan should contribute to the achievement of these conditions. Given the importance of student-generated revenues (85.4% in fiscal 2011), continued careful enrollment management will be key to achieving these targets.
Originally founded in 1907 by members of the American Baptist Church, UR is a non-sectarian private university. In addition to its main campus in Redlands, California, the university also maintains seven satellite locations used by the school of business, the school of education, and the new school of continuing studies.
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', dated June 20, 2011;
--'U.S. College and University Rating Criteria', dated July 14, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria
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