Fitch Affirms Nova Southeastern University's (FL) Rev Bonds at 'BBB '; Outlook Stable
--\\$96 million series 2013A;
--\\$18.7 series 2013B;
--\\$45.1 million series 2012A;
--\\$28.2 million series 2011;
--\\$99.9 million series 2006.
The Rating Outlook is Stable.
The bonds are a general obligation of Nova Southeastern University (NSU).
KEY RATING DRIVERS
POSITIVE OPERATING MARGINS: NSU's consistent generation of positive operating margins is a primary credit strength and anchors the 'BBB+' rating. Modest liquidity and moderate debt levels temper the rating, although the university's operating surpluses continue to generate satisfactory pro forma maximum annual debt service (MADS) coverage.
MANAGEABLE DEBT: The university's continued generation of operating surpluses supported pro forma MADS coverage of 2.9x in fiscal 2015. Additionally, Fitch recognizes the gradual but consistent movement of NSU's debt distribution to a fixed-rate long-term debt portfolio. Lastly, NSU has no additional debt plans over the medium term.
MODEST LIQUIDITY LEVELS: Unrestricted cash and investments have grown over NSU's operating history and remain adequate for its budget, which is larger than most like Fitch rated universities. However, available funds as a portion of long-term debt and expenses remain weaker than similarly rated peers.
HEALTH PROFESSIONS DEMAND: NSU benefits from a continued demand for the health professions; total headcount for these programs continues to increase with high selectivity and rising matriculation rates. Continued demand for these programs remains important for the university's operating margins and a stable credit profile.
LIQUIDITY AND DEBT MANAGEMENT: Rating stability for Nova Southeastern University is predicated upon maintaining unrestricted cash and investments and current debt levels with continued generation of positive operating margins.
EXPOSURE TO BANK AGREEMENT TERMS: Nova Southeastern University has several outstanding bank loans that include certain non-financial related covenants that could trigger an event of default and potential acceleration of certain debt, raising the risk to bondholders. Although NSU has sufficient resources to manage an acceleration of its bank loans, liquidity would be compromised, which could result in downward pressure on the rating.
NSU is the largest independent university in Florida, with its main campus located on 300 acres in Davie, FL. In fiscal 2015, NSU had FTE enrollment of 19,042 students and total adjusted unrestricted revenues of \\$625.7 million.
OPERATING MARGINS POSITIVE
The 'BBB+' rating continues to be supported by NSU's consistent operating performance which generates healthy pro forma MADS coverage, and continued focus on health professions within program offerings which enjoy sustained demand. For fiscal 2015, NSU generated a 6% operating margin, which supported pro forma MADS coverage of 2.9x.
NSU's management team continues to budget for an approximate 5% operating margin, which Fitch believes will continue to drive solid coverage metrics. In fiscal 2014, NSU generated a 4.2% operating margin; however, the university incurred higher expenses specifically related to its voluntary separation offer (VSO).
ADEQUATE LIQUIDITY METRICS
NSU's liquidity has grown year over year, and unrestricted cash, investments and temporarily restricted investments, also known as available funds (AF), totaled \\$270.8 million as of FYE 2015, which signifies a modest 1.3% increase from the prior year's \\$267.2 million AF balance. Available funds constituted 46.1% of operating expenses and 60.2% of pro forma debt. These measures are slightly improved from fiscal 2014, but NSU's available funds ratio to operating expenses and debt are somewhat weaker than similarly rated educational institutions. This weakness is somewhat mitigated by the generation of positive operating margins and continued surplus generation that supports the building of a liquidity cushion over the long term.
MIXED ENROLLMENT TRENDS
NSU's enrollment trends over the past four years continue to reflect a decline in overall headcount. Specifically, total headcount has dropped to 24,148 in fiscal 2015 (fall 2014) from 28,457 in fiscal 2012 (fall 2011), while undergraduate enrollment decreased to 4,699 in fiscal 2015 from 6,397 in fiscal 2012. Part of the decline can be attributed to NSU's shift in strategy and heightened selectivity to improve student academic quality. Incoming traditional undergraduate students as of fall 2014 were required to have a minimum 3.0 grade point average, while NSU's SAT target scores are also improved. The university acknowledges that there may be enrollment pressures due to this initiative, but expects enrollment pick-up once the strategy has been fully achieved.
Favorably, the health professions division (primarily graduate programs) continues to experience steady enrollment. Though flat over the past year, overall headcount over four years improved to 6,384 in fiscal 2015 from 5,878 in fiscal 2012 - representing an 8.6% increase. With graduate FTEs comprising approximately 80% of the total student base, NSU is unlike most of its rated peers.
CONSTRUCTION PROJECT UPDATE
In 2013 NSU borrowed approximately \\$94.2 million, which in part financed certain capital projects such as the building of the 215,000 square foot Center for Collaborative Research (CCR) and building of the 54,000 square foot Sports Center II. NSU intends for approximately 55% of CCR space to be used by the university for internal research programs, while the remaining capacity is expected to be leased to external parties.
NSU continues to report healthy interest in the space and expects lease contracts to be in place prior to the completion of the facility, which is scheduled for 2016. NSU expects the CCR to be self-supporting once operational. Management states all projects are on time and on budget, and NSU has no additional debt plans at this time.
NSU's total outstanding long-term debt, including non-cancellable operating leases, is approximately \\$449.8 million. Pro forma MADS of \\$31.2 million, excluding non-cancellable operating leases, represented 5% of unrestricted operating revenue and covered 2.9x by net available revenue from operations. This pro forma MADS coverage and moderate debt burden continues to compare favorably against rated peers within Fitch's portfolio.
NSU's fixed-to-variable-rate debt mix has changed over time and variable-rate debt including an \\$7.5 million bank loan comprises approximately 15% of total long-term debt, vs. 26.1% in fiscal 2012. Additionally, NSU has two series of bonds that are directly placed with Regions Bank and SunTrust Bank that mature in 2029 and 2024, respectively. The university's series 2008A variable rate bonds are supported by a direct pay letter of credit, which expires in 2017. While Fitch does not rate the series 2008A, series 2009, and series 2012B bonds (\\$131.5 million), it does incorporate the debt into its analysis and has reviewed the various bank documents. Certain events of default under the bank loans include the failure to meet financial reporting requirements, timely notice of an event of default as well as not meeting financial covenants, including a liquidity ratio of 30%, and debt service coverage of 1.35x.