Fitch Affirms Albany College of Pharmacy & Health Sciences (NY) 2014A Revs at 'A-'; Outlook Stable
The Rating Outlook is Stable.
The series 2014A bonds are secured by a first lien on pledged revenues consisting of gross tuition and fees, excluding auxiliary revenues, as well as a mortgage lien and security interest in the college's main academic and administrative building. The claim on pledged revenues is on parity with the unrated series 2014B bonds, which were issued concurrently and purchased by a bank.
KEY RATING DRIVERS
BALANCE SHEET AFFORDS FLEXIBILITY: The college's balance sheet resources continue to grow due to positive margins and investment earnings, providing ample flexibility and cushion against unforeseen variances in operations.
SOFTENING DEMAND FOR PROGRAMS: Demand indicators have weakened somewhat over the past three years. The college is working to diversify its program offerings into the broader health sciences, to try and offset intensifying competition for traditional pharmacy programs.
NARROWED MARGINS, COVERAGE STRONG: Operating margin remains positive, but has narrowed due to enrollment challenges and higher discounting from expansion of non-pharmacy programs. Operating performance continues to support strong maximum annual debt service (MADS) coverage in excess of 3.0x in each of the last three fiscal years.
MANAGEABLE DEBT PROFILE: ACPHS' debt burden remains moderate, with no additional debt plans in the near term. The 2014 refunding transaction reduced the college's variable rate exposure, making interest costs more stable. Fitch continues to view these changes positively.
BALANCED OPERATIONS: Albany College of Pharmacy and Health Sciences is highly reliant on student revenues, which have been subject to fluctuations based on regional competition and demand for specific programs. Rating stability depends on ACPHS' maintaining balanced operations on a GAAP basis.
ADDITIONAL DEBT ISSUANCE: Additional debt, in amounts that materially affect the college's financial profile, could pressure the rating.
ACPHS was founded in 1881 and is home to the oldest pharmacy program in New York State. The college offers six undergraduate programs and five graduate programs in health sciences, as well as a doctor of pharmacy degree (Pharm. D.). The Pharm. D. program is offered on the main campus in Albany and on the Colchester campus, the only pharmacy school in Vermont. The college is accredited by the Middle States Commission on Higher Education, which extended its accreditation in 2010 for another 10-year term. The Pharm. D. program is separately accredited by the Accreditation Council for Pharmaceutical Education, which extended its accreditation in 2011 for a six-year term.
DIVERSIFYING PROGRAM OFFERINGS TO STABILIZE DEMAND
Historically, ACPHS has focused on traditional pharmacy programs and relied on job growth in this field to support its demand base. The college has a history of generating strong application volumes and stable incoming student yields, despite its primarily regional draw and increasing competition. Recent projections, however, call for growth in demand in programs in the health sciences to exceed demand for those in pharmacy. In response, ACPHS is actively diversifying its programmatic offerings to meet student demand and maintain stable enrollment.
In the interim, however, enrollment has shown some softening, as ACPHS works to fully build out these new departments and faces an intensified marketing effort by a regional competitor. FTE enrollment grew 2.4% annually on average from 1,536 in fall 2008 to 1,690 in fall 2012, but has declined in all three of the recent academic years to 1,623 in fall 2013, 1,555 in fall 2014 and 1,472 in fall 2015. Initial enrollment figures for fall 2016 are showing another drop to 1,413 students; however, the pace of the decline decelerated. Fitch notes that these enrollment declines were all in line with budgeted expectations and is optimistic about management's ability to execute on its diversification strategy to stabilize demand going forward.
Fitch does note with some caution that as enrollment has declined, the tuition discounting rate has increased from 15.6% in fall 2012 to 22.0% in fall 2015, likely due to the expansion of non-pharmacy programs. This elevated ratio continues to compare favorably to that of other colleges and universities rated in the 'A' category. Stabilization in both enrollment and the tuition discounting rate will be essential to ACPHS' ability to maintain balanced operations, especially in light of its high dependence on student-generated revenues (89.3% in fiscal 2015).
POSITIVE MARGINS SUPPORT BALANCE SHEET
ACPHS has consistently generated positive operating margins, though these ratios have compressed as enrollment has declined. The operating margin was 4.3% in fiscal 2015, below the prior five-year average margin of 10.2%. Unaudited fiscal 2016 results show a smaller but still positive margin, which exceeds Fitch's 'A'-rated median for this metric. Smaller positive margins are still consistent with the rating category, especially considering the college's balance sheet, which has improved significantly in recent years, and strong budgetary controls.
Strategic reinvestment of operating surpluses over the past five fiscal years has dramatically increased the college's available funds (AF), defined by Fitch as cash and investments not permanently restricted. As of June 30, 2015, AF totaled $61.4 million, representing 130% of fiscal 2015 unrestricted operating expenses ($47.2 million) and a stronger 178.3% of long-term debt ($34.4 million, inclusive of non-cancellable operating leases). Both of these ratios compare favorably to rating category medians. AF has improved further as of June 30, 2016 (unaudited) based on another cash surplus and good investment returns. Fitch views positively the college's practice of setting aside operating surpluses for quasi-endowment and capital investment.
MODERATE DEBT BURDEN
Positive operating performance continues to support strong MADS coverage of close to 5.0x in fiscal 2015, with slightly lower but still strong coverage in fiscal 2016 (unaudited). As a result of the refunding in 2014, MADS was reduced to $1.7 million from $2.4 million, but extended out by six years to fiscal year 2035. The college's debt burden is moderate, as MADS accounted for 3.5% of fiscal 2013 unrestricted operating revenues.
In addition to the fixed-rate 2014A bonds, the refunding transaction included the unrated, variable-rate series 2014B bonds, which were purchased by NBT Bank, N. A. for a term of 10 years under a bond purchase agreement. The series 2014A bonds, issued under a new indenture, and the series 2014B bonds are on parity and include cross-default provisions. Fitch reviewed the related transaction documents and does not believe the terms of the bank agreements pose additional risk to bondholders.
Fitch views positively that the transaction reduced the college's exposure to variable-rate debt and eliminated near-term liquidity and renewal risks related to prior VRDB/LOC structures. Put risk remains for the series 2014B bonds at the end of the 10-year term. Fitch considers this risk to be largely mitigated by ACPHS' strong liquidity position and management's demonstrated prudence in overseeing its debt portfolio. The college has no near-term additional debt plans at this time.