New York State Dormitory Authority Pace University; Private Coll/Univ - General Obligation

Transcription

1 New York State Dormitory Authority Pace University; Private Coll/Univ - General Obligation Primary Credit Analyst: Charlene P Butterfield, New York (1) ; charlene_butterfield@standardandpoors.com Secondary Contact: Carolyn McLean, New York (1) ; carolyn_mclean@standardandpoors.com Table Of Contents Rationale Outlook Enterprise Profile Financial Profile Related Criteria And Research FEBRUARY 5,

2 New York State Dormitory Authority Pace University; Private Coll/Univ - General Obligation Credit Profile US$ mil rev rfdg bnds (Pace Univ) ser 2013A dtd 02/01/2013 due 07/01/2042 Long Term Rating BBB-/Stable New US$17.25 mil taxable rev rfdg bnds (Pace Univ) ser 2013B dtd 02/01/2013 due 12/15/2042 Long Term Rating BBB-/Stable New New York State Dorm Auth, New York Pace Univ, New York New York St Dorm Auth (Pace University) ser 2005A, 2005B Unenhanced Rating BBB-(SPUR)/Stable Affirmed Many issues are enhanced by bond insurance. Rationale Standard & Poor's Ratings Services assigned its 'BBB-' long-term rating to the $106.9 million series 2013A tax-exempt revenue bonds and the $17.3 million series 2013B taxable revenue bonds to be issued by New York State Dormitory Authority for Pace University. In addition, Standard & Poor's affirmed its 'BBB-' underlying rating (SPUR) on Pace's debt issued previously by the authority. The 'BBB-' rating reflects our opinion that Pace's demand has stabilized, and financial performance and financial management have improved during the past few years. The rating also reflects our view of Pace's: Very weak level of expendable resources, driven by a history of operating losses on a full accrual basis before fiscal 2011 and the recognition of significant other postemployment benefit (OPEB) liabilities; Limited revenue-raising flexibility due to strong competition and an already high level of tuition and fees; and Increasing debt level upon the issuance of the series 2013A bonds, and moderately high debt service, including operating lease expense. Positive rating factors include: Stable enrollment levels with a continued and significant increase in full-time undergraduates, which has been a key driver of improved financial performance; Maintenance of full accrual operating surpluses through fiscal 2012; and A level of cash and investments that is consistent with the 'BBB' rating category. Management will use the series 2013A bond proceeds to fund various capital projects, refund the outstanding series 2005A bonds, fund a related swap termination payment, and pay costs of issuance. Management will use the proceeds FEBRUARY 5,

3 of the series 2013B bonds to refund the outstanding series 2005B bonds and pay costs of issuance. Upon issuance of the series 2013AB bonds, Pace's total pro forma debt will be roughly $172 million. In our view, the pro forma debt structure, which will be heavily fixed-rate, is a positive credit factor. The series 2013AB bonds, as well as Pace's existing debt, are a general obligation of the university. Management is considering a large debt issuance to fund a portion of its master capital plan, sometime during the next two years. Without significant growth in financial resources, a large debt issuance could pressure the rating. As the size, scope, and timing of the potential debt issuance has not been finalized, we have not included the plans in our current rating analysis. Standard & Poor's will evaluate the effect of the potential debt issuance once plans are finalized, and in light of management's ongoing efforts to further strengthen the financial profile. Outlook The stable outlook reflects our expectation that, during the next one to two years, enrollment and overall demand will remain stable or demonstrate positive trends, and that financial performance will be consistently breakeven or better, on a generally accepted accounting principle (GAAP) basis. Our outlook also reflects our expectation that new debt will be offset by liquidity growth. While we believe that expendable resources will remain very low, depressed by significant OPEB liability, expendable resources will not be further reduced. During the next one to two years, we could consider a negative outlook or downgrade if operating performance returns to deficit levels, or if financial resources deteriorate from current levels, such that cash and investments compared with expenses and debt fall below 30% and 85%, respectively. A significant increase in debt without a commensurate increase in financial resources could also result in an outlook or rating change during the next one to two years. Due to the low levels of financial resources and recent increase in debt, we do not view a positive outlook or higher rating as likely during the next one to two years. Beyond the outlook period, we could consider a positive outlook or higher rating if Pace's operating surplus increase significantly, with margins greater than 2%, or if expendable resources increase to soundly positive levels of at least 10% of expenses and 30% of debt, and if management presents a plan regarding the funding of the significant OPEB liabilities. Enterprise Profile Organization Pace University, founded in 1906, is an independent, comprehensive university, and includes the following schools and colleges: the Dyson College of Arts and Sciences; Lubin School of Business; the College of Health Professions/Lienhard School of Nursing; Pace Law School; the School of Education; and the Seidenberg School of Computer Science and Information Systems. Originally founded in New York City, today Pace has five campuses in New York City and Westchester County. The university has one of the largest cooperative education programs in the New York metropolitan area. FEBRUARY 5,

4 Demand and enrollment Recent demand trends have been stable with a headcount enrollment of 12,772 for fall 2012, which is up slightly from the previous year, as was FTE (full-time equivalent) basis. The number of full-time undergraduates has risen steadily since fall 2007, reaching 7,107 for fall 2012 compared with 6,870 for fall Graduate headcount was softer at 4,436 for fall 2012 compared with 4,568 for fall 2011, as enrollment in education programs has decreased. Undergraduate applications continued to increase through fall 2012, reaching 12,885 compared with 11,778 for fall 2011 and 8,376 for fall 2007, which was a low point for the university. We consider the university moderately selective, with 77% of freshmen accepted for fall It is possible that the university's undergraduate selectivity measures will improve as the number of freshmen applications continues to grow. Management indicates that applications for fall 2013 are also ahead of prior-year levels. The university operates in a highly competitive environment for students, as characterized by a matriculation rate of 19% for fall 2012, compared with 16% for fall We believe that matriculation rates could continue to fall as the university's applicant pool grows. Student quality is slightly above average, with SAT score averages of 1088 for the most recent enrollment goals for fall In general, a growing level of traditional full-time undergraduates led to improved financial results for the university. For fall 2012, there were 1,848 freshmen enrolled, which is up significantly from an institutional low of 1,169 for fall Transfers are an important element in enrollment for the university, comprising 672 entering students for fall 2012, compared with 503 transfers for fall Recent recruiting initiatives also include international students who now comprise 5% of total undergraduates. Law school applicants for fall 2012 dropped sharply, as did the number of matriculants, a trend that we are observing at other law schools across the country. Projections prepared by management that show positive performance in the future do not rely on continued enrollment growth. Key competitors for undergraduate students vary by campus, but include St. Johns University, Hunter College of the City University of New York, Fordham University, Hofstra University, Iona College, and State University of New York at Stony Brook. Management Pace appointed its current chief financial officer in January 2012, and named a new provost in May All other members of the senior management team have served in their respective roles for at least the past two years. Under the current administration's leadership, Pace has refocused its marketing and recruiting efforts, with a particular emphasis on increasing the number of full-time undergraduates and key professional schools. Pace uses a rigorous set of financial planning and modeling techniques such as frequent cash monitoring, preparing interim financial statements on a GAAP basis, and multiyear forecasting, which we consider best practices. Management indicated it is committed to maintaining these practices and to maintaining the financial discipline necessary to produce breakeven or better financial performance on a GAAP basis. The university is currently operating under a five-year strategic plan from 2010 through 2015 that includes six strategic components. The plan involves some facility needs, funded in part by the series 2013A and 2013B bonds. The university's board is predominantly a prominent, local board, but has been instrumental in past fundraising results. FEBRUARY 5,

5 Financial Profile Financial performance Pace is highly dependent on tuition and fee revenue, which accounted for 93% of its total adjusted revenue in fiscal We believe that Pace has limited flexibility in raising tuition rates based on its current high tuition rate compared with competitors and pressure on financial aid. One of the university's key enrollment strategies for fiscal 2012 was increasing its commitment to financial aid. While the number of students has risen dramatically during the past few years, so too did the level of financial aid. The tuition discount rate rose from 22% for fiscal 2007 to 34% for fiscal 2012; institutional financial aid rose from $83.9 million to $122.3 million from fiscal 2009 to fiscal Despite the growth in the tuition discount, Pace posted a $1.5 million operating surplus for fiscal 2012, compared with $7.7 million in fiscal The drop in surplus reflects the slower rate of revenue growth combined with an increase in the rate of expense growth. Management's budget for fiscal 2013 incorporates a full accrual surplus. Financial resources The rating reflects Pace's low level of financial resources, which limits upward rating potential. As of June 30, 2012, Pace recorded $150.1 million of cash and investments, which was up from $141.1 million on June 30, Most of this money reflected the university's endowment of $121.8 million, the vast majority of which is permanently and temporarily restricted. This level of cash and investments is good for the rating category at 35% of adjusted fiscal 2012 operating expenses, 95% of outstanding debt, and 87% of pro forma debt. However, expendable resources are substantially lower than total cash and investments, equal to a negative 9% of adjusted operating expenses, negative 25% of outstanding debt, and negative 23% of pro forma debt. Expendable resources would be slightly positive (approximately $49 million as of June 30, 2012, if adjusted for the significant postretirement liability). The university decreased its unrestricted net assets by a significant accrued postretirement benefit obligation liability of $88 million as of June 30, 2012, which is up from the obligation recorded the previous year. Management forecasts its cash flow needs on a regular basis throughout the fiscal year on a 13- and 12-month basis. However, management indicates that its liquidity is currently sufficient for operating purposes and it has identified $25.6 million of cash and short-term investments, including $9.5 million of unused note capacity as of June 30, Of the university's long-term assets of $136.1 million as of June 30, 2012, $8.2 million was highly liquid debt service reserves held by bond trustees, and another 42% were level 1 assets. Management indicates its monthly liquidity as of June 30, 2012, was consistent with the majority of assets classified as level 2 assets. Very little of the investments ($11 million) were level 3, and illiquid, instruments. As of June 30, 2012, the university was in compliance with its financial covenants with respect to its 2005 New York State Dormitory Authority bonds; however, it had collateral deposits in fiscal 2012 to fund a debt service reserve fund to replace the surety bond previously provided by the bond insurer. As of June 30, 2012, approximately $2.5 million was deposited with the trustee for surety. Debt Pace had total debt outstanding of $157.6 million as of June 30, 2012, which will increase to $172.3 million upon issuance of the series 2013A and 2013B bonds. The $46 million note payable on June 30, 2012, is an obligation held by Bank of America. The interest rates paid on that loan in fiscal 2012 were favorable and the term runs through June The university is also committed to a significant amount of operating lease expense each year, with a net total of FEBRUARY 5,

6 $19.2 million in fiscal On its long-term bonded debt, pro forma maximum annual debt service is $10.4 million in fiscal 2021, which we consider manageable at 2.4% of fiscal 2012 adjusted operating expenses. Including operating leases, debt service is much higher at $29.4 million or moderately high at 6.8% of adjusted fiscal 2012 operating expenses. Fundraising The university is pursuing new fundraising initiatives in concert with its new strategic and master plan from 2010 to 2015, with two separate initiatives identified for future fundraising. The first is a $10 million short-term campaign for the Pleasantville campus and the second is a possible capital campaign. Management indicated that there is an additional opportunity to raise the alumni-participation level, especially since the majority of alumni remain in the greater New York area, and it has established a goal of 15% to 20% for alumni participation. In fiscal 2013, management expects to raise $1 million to $1.5 million for the unrestricted annual fund. Pace University Selected Financial Statistics --Fiscal year ended June 30-- Medians Private Colleges & Universities BBB Enrollment and demand Headcount (HC) 12,593 12,752 12,706 12,704 MNR Full-time equivalent (FTE) 10,344 10,338 10,297 9,915 3,177 Freshman acceptance rate (%) Freshman matriculation rate (%) Undergraduates as a % of total enrollment (%) Freshman retention (%) Graduation rates (5 years) (%) Income statement Adjustment operating revenue ($000s) 429, , , ,829 MNR Adjustment operating expense ($000s) 428, , , ,133 MNR Net operating income ($000s) 1,505 7,699 (2,643) (2,304) MNR Net operating margin (%) (0.7) (0.6) 3.3 Change in unrestricted net assets ($000s) (15,630) 13,929 (17,627) (20,669) MNR Tuition discount (%) Tuition dependence (%) Debt Outstanding debt ($000s) 157, , , ,144 50,462 Current debt service burden (%) Current MADS burden (%) MNR Financial resource ratios Endowment market value ($000s) 121, , ,528 92,990 51,379 Cash and investments ($000s) 150, , , ,867 MNR Unrestricted net assets ($000s) ,271 2,342 19,969 MNR Expendable resources ($000s) (38,905) (29,083) (43,711) (169) MNR FEBRUARY 5,

7 Pace University Selected Financial Statistics (cont.) Cash and investments to operations (%) Cash and investments to debt (%) Expendable resources to operations (%) (9.1) (7.2) (11.2) Expendable resources to debt (%) (24.7) (19.7) (27.9) (0.1) 73.2 Average age of plant (years) Total adjusted operating revenue = unrestricted revenue less realized and unrealized gains/losses and financial aid. Total adjusted operating expense = unrestricted expense plus financial aid expense. Net operating margin = 100 times (net adjusted operating income/adjusted operating expense). Tuition dependence = 100 times (gross tuition revenue/adjusted operating revenue). Current debt service burden = 100 times (current debt service expense/adjusted operating expenses). Current MADS burden = 100 times (maximum annual debt service expense/adjusted operating expenses). Cash and investments = cash + short-term and long-term investments. Expendable resources = unrestricted net assets + temporarily restricted net assets - (net PPE- outstanding debt). Average age of plant = accumulated depreciation/depreciation and amortization expense. MNR--Median not reported. Related Criteria And Research USPF Criteria: Higher Education, June 19, FEBRUARY 5,

8 Copyright 2013 by Standard & Poor's Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription) and (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at FEBRUARY 5,