Fitch Ratings has affirmed the 'BBB+' rating on approximately $45.4 million of fixed rate civic facility revenue bonds issued by the City of Yonkers Industrial Development Agency (NY) on behalf of Sarah Lawrence College (SLC).
The Rating Outlook is Stable.
Civic facility revenue bonds are secured by a pledge of tuition revenues and by a first mortgage lien on the mortgaged property, which consists of most of the real assets of the college.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'BBB+' rating primarily reflects Sarah Lawrence College's unique educational delivery model, which contributes to its competitive demand profile and stability in enrollment over time. Counterbalancing factors include SLC's track record of negative operating performance, driven primarily by increasing level of tuition discounting, and dependency upon endowment spending to subsidize operations.
RESOURCE ADEQUACY: Balance sheet resources continue to provide a sufficient cushion, although lower than the peak level (fiscal 2007) achieved prior to the dislocation of the financial markets. SLC's exposure to less liquid alternative assets is manageable.
EVOLVING FINANCIAL AID STRATEGY: SLC plans to reverse declines in net tuition and fee income through enhancing the sustainability of its financial aid model. Operating improvements are expected to be gradual, taking place over the next three years.
WHAT COULD TRIGGER A RATING ACTION
PRESSURED FINANCIAL CUSHION: Declines in balance sheet resources, as a result of increased operational subsidies, could impact the rating and/or Outlook.
SLC's revenue base, like many small liberal arts colleges, is tuition dependent. In fiscal 2011, tuition and fees accounted for approximately 83% of the total unrestricted operating revenues. Due to this concentration, management's ability to successfully meet enrollment goals is a key driver in balancing operations.
SLC achieved its undergraduate enrollment goal of 1,200 undergraduate students one full year (fall 2011) ahead of the original plan (fall 2012). Despite achieving this goal, SLC has been unable to stabilize operating performance, on a GAAP basis, at or above the break-even level. Increased financial aid reduced the revenue benefit SLC should have realized with a larger class.
SLC has a high cost educational delivery model, with tuition among the highest in the nation. Given the economic environment, student aid needs have increased causing the tuition discount rate to climb to 36.4% in fiscal 2011, up from the 27.2% level reached in 2007. As part of its plan to stabilize operations, the college is changing its financial aid policies and model. These changes are expected to include increasing the size of the applicant pool and fundraising for current financial aid needs and endowed scholarships
As a result of these changes, SLC projects that operations, on a GAAP basis, will be balanced by fiscal 2015. To the extent tuition discounting remains at or below current levels, Fitch views such projections as achievable. Like many private colleges, SLC is dependent upon an annual payout from endowment; the spending rate currently equals a moderately high 6% of the trailing 12-quarter investment portfolio average market value. While SLC plans to gradually reduce this rate to 5.5%, Fitch does not expect the need for an annual operating subsidy to disappear.
SLC's balance sheet continues to recover from the financial market crisis, though resources remain below their peak level ($53.3 million, fiscal 2007). As of May 31, 2011, available funds, defined as cash and investments not restricted, totaled $44.5 million. As a percentage of fiscal 2011 operating expenses and financial leverage, available funds represents 63.6% and 95.3%, respectively. Both ratios are consistent with Fitch's expectations for a 'BBB+' private college or university.
When adjusted for alternative asset classes, namely private equity, fiscal 2011 available funds decline to $26.4 million; adjusted available funds represent 37.7% of operating expenses and 56.6% of debt. SLC's exposure to alternative assets is somewhat higher than other similarly rated private colleges or universities. Illiquidity, accessibility, and valuation risks associated with these investments are partially offset by SLC's active management of the investment portfolio and monitoring of liquidity needs.
SLC's debt burden based upon maximum annual debt service ($3.715 million, fiscal 2042) and fiscal 2011 total operating revenues is moderately high, though manageable at 5.8%. Over the next 18-36 months, SLC expects to issue up to $40 million of additional bonds to finance various capital projects, including a portion of costs associated with constructing a new student center and various improvements to existing student housing.
In Fitch's view, given existing calls on SLC's balance sheet to support operations, additional debt without a commensurate rise in resources would yield credit pressure. Importantly, management has indicated that future borrowing would be timed to coincide with sustained operating improvements and successful fundraising in support of certain projects (e.g., student center). SLC is currently in the silent phase of a multi-year fundraising effort that will focus on facilities and financial aid. Announcement of the public phase is not expected until 2013.
Founded in 1926, SLC is a private, liberal arts college located in Yonkers, NY, approximately 20 miles north of midtown Manhattan. As a residential college, 100% of SLC's first year students reside on campus, with approximately 85% of the total student body living on site.
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;
--'Fitch Affirms Sarah Lawrence College (NY) Rev Bonds at 'BBB+'; Outlook Stable, dated May 23, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria
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