Fitch Rates North Carolina A&T State University Series 2015 Revs 'A+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned an 'A+' rating to approximately $98 million of revenue bonds issued by the University of North Carolina Board of Governors (BOG) on behalf of North Carolina Agricultural and Technical State University (NCA&T).
The bonds are expected to sell via negotiation the week of Nov. 10, 2015. Proceeds will largely finance the construction of a student life complex, pay capitalized interest, and pay costs of issuance, with about $ $7.5 million to refund NCA&T's outstanding series 2006B pooled revenue bonds.
The Rating Outlook is Stable.
General revenue bonds (GRBs) are secured on a parity basis by and payable from legally defined available funds of NCA&T, including unrestricted general fund balances and unrestricted quasi-endowment fund balances. Specifically excluded are state appropriations, tuition, special facility revenues and restricted funds. The series 2015 bonds are not expected to have a debt service reserve fund or a mortgage lien.
KEY RATING DRIVERS
'A+' RATING ASSIGNED: The rating reflects NCA&T's demand niche as one of the nation's largest historically black colleges and universities (HBCU), steady enrollment trends, low debt burden, and significant, albeit pressured, state operating and capital support. Counterbalancing factors include an uneven GAAP operating margins, narrow balance, and political limitations on tuition flexibility.
STABLE MARKET POSITION: NCA&T is a regional public university with a diverse set of programmatic offerings, which help insulate it from reduced demand in a particular field of study, and is particularly well-regarded for its school of engineering. Total headcount enrollment is relatively steady and benefits from the university's recently enhanced ability to recruit out-of-state students and ongoing efforts to improve student retention.
LOW DEBT BURDEN: The proposed issuance will increase total financial leverage; however, debt carrying charges are expected to remain low, supporting continued debt affordability. Post issuance, there are no near-term debt plans.
ADEQUATE FINANCIAL PROFILE: NCA&T's financial profile is characterized by a track-record of uneven GAAP margins and a limited financial cushion. The revenue base is relatively diverse, although the primary streams face limitations on growth.
WEAKENED FINANCIAL PROFILE: North Carolina A&T State University's issuance of additional debt without commensurate growth in revenues and financial resources would likely exert negative rating pressure, as would slimmer operating results that drive weakened debt service coverage.
PRESSURED FOUNDATION-RELATED STUDENT HOUSING: Significant financial or operational stress at North Carolina A&T State University Foundation's housing units could negatively pressure the university's credit profile.
Established in 1891, NCA&T is a public, co-educational, HBCU within the 17-institution North Carolina public university system (one of two land grant designated institutions in the state). The university sits on approximately 200 acres in Greensboro, North Carolina and also maintains a 492-acre working and producing farm. Its regional accreditation with the Southern Association of Colleges and Schools - Commission on Colleges was most recently reaffirmed in 2010 for a 10-year term. Based on fall 2015 enrollment numbers, NCA&T is the largest HBCU in the nation.
The university offers 57 undergraduate degree programs, 30 master's degree programs, and nine doctoral programs through its two professional colleges and seven schools, including the Joint School of Nano-science and Nano-engineering, an academic collaboration between NCA&T and the University of North Carolina at Greensboro.
STABLE MARKET POSITION
NCA&T is a regional, mid-sized public university with a diverse set of programmatic offerings, which help insulate it from reduced demand in a particular field of study, and is particularly well-regarded for its school of engineering. With the BOG's approval, management has phased out certain underutilized programs in recent years while adding new academic offerings, primarily at the graduate level, to support continued student demand.
Fall 2015 headcount enrollment stood at 10,879. Overall headcount stability is supported by healthy freshmen-to-sophomore retention rates (75% in fall 2015) with modest dips primarily reflecting fewer entering freshmen students and steadily improving graduation rates. Graduate headcount enrollment dipped by a sizeable 10% in fall 2014 and then stabilized in fall 2015, which is inconsistent with historical trends. Importantly, the lower graduate enrollment has only a modest impact on total headcount enrollment as the student body is predominantly undergraduate (86% in fall 2015).
In line with its mission, a majority of the university's students are from North Carolina. Historically, the university had an 18% cap for out-of-state freshmen, although the school of engineering, one of the state's three engineering colleges was not subject to the cap. In January 2014, the BOG approved the NCA&T's proposal for a 7% increase on the cap for out-of-state freshmen to 25% beginning for fall 2014. Fitch views the action as a credit positive as it will help boost student-generated revenues given the sizeable difference between resident and non-resident tuition and further diversify the geographic composition of the enrollment base.
LOW DEBT BURDEN
On an aggregate basis, the university's debt profile (excluding foundation-related debt discussed below) is composed of fixed-rate, fully amortizing securities, which is viewed positively by Fitch. Based on a preliminary debt schedule, the university's aggregate maximum annual debt service (MADS) of around $8 million (fiscal 2020) represented a low 3.1% of Fitch-adjusted fiscal 2014 unrestricted operating revenues. Institutional MADS coverage from fiscal 2014 net operating income was sound at 1.7x but is expected to improve based on unaudited fiscal 2015 results. The BOG approved a new student fee that is part of legally defined available funds for debt repayment on the series 2015 bonds. The university only began to collect revenues derived from that new student fee in fiscal 2014, and the fee incrementally increases each year through fiscal 2017.
NCA&T's foundation had $22.4 million of series 2004A fixed-rate bonds and $17.1 million of series 2004B variable rate demand bonds outstanding as of June 30, 2014. At June 30, 2014, around 52% of the series 2004B bonds were hedged through a swap with Wells Fargo N.A. (rated 'AA-/F1+' by Fitch). The bonds mature on June 1, 2035, whereas the termination date of the swap is March 1, 2019. No collateral posting is required on the swap. The tender option on the Foundation's series 2004B bonds is supported by a direct pay letter of credit agreement.
The series 2004A and series 2004B bonds are not a legal obligation of the university; however, Fitch believes that management has strong incentive to support the project given its strategic importance to the university (foundation-related housing represented 33% of available beds on campus in fall 2015). At present time, credit risk associated with foundation-related debt is mitigated by the strong economic performance of the on-campus project. MADS coverage, including the foundation bonds, remains sound at 1.4x in fiscal 2014.
ADEQUATE FINANCIAL PROFILE
The university's financial profile is characterized by a track-record of breakeven to somewhat negative GAAP-based operating margin (averaging -0.6% between fiscal 2010 and 2014), although consistently positive on a cash basis when adding back the annual depreciation expense. Fitch expects the operating margin for public colleges and universities to be at least break even on a GAAP basis. The university does receive capital support from the state which is available to cover deferred maintenance; however, this funding source has been uneven in recent years. The state did pass a bond package in 2000 for the improvement and expansion of facilities in the UNC System, which helped NCA&T to complete major renovation projects on campus.
Net tuition/fees and state appropriations are the two largest funding sources in the operating budget, although Fitch notes that NCA&T has become less reliant on the latter. Despite this downward trend, Fitch still considers state appropriations to be a significant source of operating revenue; subsequently, the financial condition of the state continues to be an important credit consideration to NCA&T since reductions in the state budget could adversely affect funding levels. Federal grants and contracts, primarily tied to sponsored research and the Pell Grant, also represent important revenue streams.
In Fitch's view, the revenue base is relatively diverse, although the primary streams face some limitations on growth. Specifically, funding streams face some pressure from political limitations on tuition flexibility, a challenging state funding environment, and constrained federal research dollars. Some comfort is gained from management's demonstrated commitment to containing expense growth, which is supported by the absence of collective bargaining units on campus.
Positive operating cash flow has supported an adequate level of balance sheet flexibility. Available funds, defined by Fitch as cash and investments less certain restricted net assets, totaled approximately $55.7 million at fiscal year-end 2014. Notably, the calculation of available funds under the GRB indenture differs from Fitch's calculation of available funds, which it uses as a measure of balance sheet strength).
NCA&T's financial cushion relative to operating expenses is narrow, but comparable to other Fitch rated public colleges and universities in the 'A' rating category, representing 22% of fiscal 2014 operating expenses. Available funds relative to pro-forma long-term debt excluding and including foundation-related debt were a slightly stronger 47.2% and 40.3%, respectively.
The separately incorporated NCA&T foundation held approximately $12.5 million in unrestricted cash and investments and around $4.4 million in permanently restricted endowed investments at fiscal year-end 2014. Fitch does not include these monies as part of its available funds calculation but recognizes they ultimately benefit the university.