Fitch Rates Lipscomb University, TN Revs at 'BBB'; Outlook Stable
OREANDA-NEWS. Fitch Ratings assigns a 'BBB' rating to the expected issuance of approximately $62 million of Health and Educational Facilities Board of the Metropolitan Government of Nashville and Davidson County, TN revenue and refunding bonds, series 2016A, on behalf of Lipscomb University (Lipscomb).
The Rating Outlook is Stable.
The series 2016A bonds are expected to be issued as fixed rate debt. Bond proceeds will be used to refinance approximately $58 million of existing variable rate bank placement notes, fund various capital projects, and pay cost of issuance. The bonds are expected to sell the week of Feb. 22 through negotiation.
Separately, the university will enter into a new $42.35 million variable rate bank placement (series 2016B), on parity with the series 2016A bonds but not rated by Fitch, which is expected to be funded-up over time.
Bonds are an unsecured, general obligation of Lipscomb.
KEY RATING DRIVERS
INITIAL RATING ASSIGNED: The 'BBB' rating reflects Lipscomb's balanced operations, which drive satisfactory coverage of pro forma maximum annual debt service (MADS), as well as stable student demand. Offsetting credit factors include thin liquidity, a moderately high debt burden and post-issuance exposure to significant variable rate debt, and interest rate derivatives with their inherent risks.
STEADY ENROLLMENT: Lipscomb is a private mission-driven liberal arts university offering broad-based programs with a regional draw. Lipscomb also operates the Academy, a k-12 independent school. Headcount, including the Academy, is generally stable. A new strategic plan targets enrollment growth over five years through new program offerings.
SLIM BUT POSITIVE OPERATIONS: Positive operations generally support adequate coverage of pro forma MADS of 1.5x in fiscal 2015. Margins have been sound averaging 2.3% annually since fiscal 2010, though results narrowed in fiscal 2014 and fiscal 2015 to around break-even.
LIMITED FINANCIAL CUSHION: Liquid resources provide a limited cushion to absorb operating margin compression or capital spending associated with academic program expansions. The ratios of available funds to fiscal 2015 operating expenses and pro forma long-term debt equaled about 47% and 51%, respectively, which is adequate for the 'BBB' rating category.
FINANCING RISKS: Lipscomb remains exposed to financing and put risk related to variable rate direct placement bank facilities and three floating to fixed rate swap agreements, absent sizable liquid reserves. Post issuance, Lipscomb will refinance its existing variable rate debt as fixed, but enter into a new variable-rate bank placement. The net effect is expected to be about 57% of traditional fixed rate debt and 43% variable rate debt, an improvement from 93% variable rate, all of which will be hedged. The swaps are not expected to have rating triggers or collateral posting requirements, which limits some financing risks.
LIQUIDITY AND DEBT MANAGEMENT: Rating stability for Lipscomb University is predicated upon maintaining unrestricted cash and investments and current debt levels with generation of positive operating margins. Additional debt without commensurate increase in liquid resources could pressure the rating.
GROWTH PLANS: Rating stability depends on Lipscomb University maintaining healthy enrollment and achieving projected operating performance metrics. Inability to meet forecast operations would pressure the rating.
EXPOSURE TO BANK AGREEMENT TERMS: Lipscomb University will have several outstanding direct bank placement facilities post issuance that include certain financial and non-financial covenants that could trigger an event of default and potential acceleration of debt, raising the risk to bondholders. Although the university has sufficient resources to manage an acceleration of its bank loans, liquidity would be compromised and could result in downward rating pressure.
Lipscomb is a private, Christian liberal arts non-profit institution located in Nashville, Tennessee. Lipscomb was founded in 1891 as the Nashville Bible School and granted its first accreditation by the Southern Association of Colleges and Schools (SACS) in 1954 as David Lipscomb College before becoming Lipscomb University in 1988. The university offers associate, bachelors, masters and doctoral degrees to about 4,680 students.
In addition, the university owns and operates The Academy, an independent, college preparatory and co-educational school serving about 1,262 pre-k through 12th grade students. The Academy is located on Lipscomb's campus and offers a myriad of advanced placement and honors courses, making it a feeder to the university.
STABLE DEMAND PROFILE
Lipscomb exhibits generally growing enrollment trends, though some softening occurred in fall 2014. However, total university headcount enrollment rebounded by 4.3% in fall 2015 to 4,680 students. Softening growth at the university level occurred in both traditional undergraduate and graduate students but was offset by growth in the non-traditional undergraduate cohorts, including nursing. Lipscomb is a private regional university that is positioning itself for growth.
The university's most recent strategic plan (The 2020 Plan) targets about 12% budgeted enrollment growth over five years to about 5,250 in fall 2020 (fiscal 2021). New academic programs and strategic initiatives under the plan are expected to drive additional enrollment growth. Fitch views the growth plans as presented could pressure operations if supplementary cash flow from new initiatives are not realized as expected. Fitch will monitor such progress.
CONSISTENTLY POSITIVE OPERATIONS
Lipscomb operates in a highly competitive environment that limits pricing flexibility. Its overall revenues (which include the Academy) are concentrated in student derived tuition and fees (87.8%), which is not uncommon for private institutions.
Operations are historically positive, with an adjusted operating margin (including the endowment draw) averaging about 2.3% over the past five years (fiscal 2010-2015), despite increasing student institutional aid in recent years. However, operations narrowed in the last two years to closer to break-even, resulting in a 0.3% margin in fiscal 2015. Management projects a net operations surplus for fiscal 2016. Positively, net tuition and fee revenues have increased annually since at least fiscal 2010, and the overall tuition discounting rate has remained stable.
Annual surpluses continue to generate sufficient net income for debt service. Under the current plan of finance, Lipscomb's fiscal 2015 adjusted net income from operations provide an adequate 1.5x coverage of maximum annual debt service (MADS).
Fitch will continue to monitor Lipscomb's ability to generate surplus operations in line with financial projections. Failure to maintain positive operating margins and adequate debt coverage could pressure the rating. The university's positive operating margins are consistent with Fitch's expectations for a 'BBB' rated private university.
Lipscomb's balance sheet resources have remained fairly stable over the past few years and provide a slim financial cushion. Available funds (defined by Fitch as cash and investments not permanently restricted) totaled about $61 million in fiscal 2015 and covered operating expenses and pro forma long-term debt by an adequate 47% and 51%, respectively.
Excluding financial assets deemed alternative investments (moderately high at 33%), balance sheet resources provide somewhat less financial flexibility (33% and 36%, respectively). Lipscomb's modest balance sheet liquidity, as adjusted, lags most of the 'BBB' category peer group.
RISKY DEBT PROFILE
Post issuance, debt will total about $120 million, including bank notes. Under the plan of finance, Lipscomb will refinance $58 million of variable rate bank debt with series 2016A fixed rate debt, and extend the maturity of the refunded debt by 10 years. At the same time, the university will issue $42.35 million of new variable rate bank debt, on parity with the series 2016A bonds, which is expected to be about $20 million initially and then funded up over time. The new bank debt has mandatory put/reset dates after 10 years. The net effect of the Series 2016A and 2016B debt will be relatively level annual debt service.
The Master Trust Indenture provides that the public bonds and bank debt are all unsecured creditors with equal rights to whatever funds are available. Further, the MTI obligations and the swap obligations are unsecured general obligations of the university. A sum sufficient rate covenant is mapped to annual debt service and a 1.00 times additional bonds test tied to MADS.
Lipscomb's outstanding swaps loosely match up to underlying variable rate debt. Existing interest rate swaps have staggered maturities and a swap notional of about $51 million. Under the plan of finance, the swaps will remain in place and an offsetting cash flow hedge will restructure the swap portfolio.
There will be no termination payment resulting from the restructuring. Further, there is no collateral posting requirements or rating triggers associated with the existing swaps or the proposed offset.
Essentially, the university is moving from a portfolio of approximately 90% synthetically-fixed variable rate bank debt to a portfolio of about 57% traditional fixed rate public debt and 43% variable rate bank debt, all of which is hedged. This reduces the university's exposure to variable rate debt, although the exposure remains high for the rating category. Fitch believes a significant amount of financing risk still exists under the proposed debt structure given that all of the university's variable rate debt will be hedged with interest rate swaps.
Pro forma MADS is moderately high but manageable at about 6% of fiscal 2015 operating revenues. Lipscomb has historically funded capital and deferred maintenance needs with internal resources and fundraising rather than debt. However, phase III of the university's 2020 Capital Plan contemplates $35 million of additional debt between fiscals 2019-2021. Issuance of additional debt without a commensurate increase in liquid resources could pressure the rating.