Fitch Upgrades Embry-Riddle Aeronautical Univ, FL Revs to 'A-'; Outlook Revised to Stable
Fitch Ratings has upgraded the rating, to 'A-' from 'BBB+', on approximately $164.6 million Volusia County Educational Facilities Authority, FL (VCEFA) revenue and refunding bonds (Embry-Riddle Aeronautical University (ERAU), Inc. project).
The Rating Outlook is revised to Stable from Positive.
The bonds are secured by a gross revenue pledge of ERAU. As additional security, the university has granted a mortgage lien on its Daytona Beach campus.
KEY RATING DRIVERS
OVERALL STRENGTHENING MERITS UPGRADE: The upgrade to 'A-' reflects a history of positive operations, supported by stable enrollment, low debt burden and growing balance sheet resources. The aforementioned attributes are offset in part by a high reliance on student derived revenues.
FUNDAMENTAL DEMAND STRENGTH: The university's international reputation within aeronautical and aerospace engineering underpins stable to growing enrollment trends.
PRUDENT FINANCIAL MANAGEMENT: ERAU's timely and consistent management of operating fluctuations has enabled ongoing generation of operating surpluses that provide strong pro forma debt service coverage and support liquidity growth.
MANAGEABLE CAPITAL SPENDING PLANS: The university will continue to utilize a portion of its internal resources, which it has significantly increased over the past few years, to fund capital projects. Based on projected cash flows, Fitch expects ERAU's balance sheet liquidity will remain relatively stable given the university's strong performance trends and lack of additional debt plans.
The upgrade to 'A-' from 'BBB+' is indicative of consistently positive operating performance, which has increased the university's overall financial flexibility. Over the last five years, ERAU's operating margin has averaged 5.7%, never dropping below 2.6%. The sustained track record of positive operations with surpluses that supplement balance sheet resources and the stable to growing headcount is consistent with Fitch's expectation for an 'A' category private university.
Further, ERAU's operating health has helped bolster its financial resource base to a level consistent with the rating. Available funds (defined by Fitch as cash and investments not permanently restricted) grew 80% from fiscal 2008 - fiscal 2012, reaching a record high in fiscal 2012 ($184.1 million). While available funds provides adequate coverage (62%) of fiscal 2012 operating expenses ($296.8 million), which is consistent with Fitch's expectation for a 'BBB' rated private institution, relative to leverage, available funds is a solid 112.7% of total outstanding debt and more reflective of an 'A' rated private institution.
ERAU's moderately low debt burden of 3.7% with no additional debt plans, and strong coverage of pro-forma debt service from net available income of 4.4x is viewed positively.
Fitch anticipates continued surpluses will be offset by the use of reserves to fund capital projects. ERAU's five year-capital improvement plan includes approximately $60 million for current major facilities projects, of which $38 million will be used to build a new arts and science building, and approximately $97 million for projects pending approval, including a new student union.
ERAU's internal cash flow projections reflect a decrease in year-end cash balances of $15.2 million and $7.9 million in fiscal years 2013 and 2014, respectively; however, available funds is not expected to be significantly impacted. Fitch will continue to monitor ERAU's ability to maintain relatively consistent available funds to support stabilization in liquidity ratios.
ERAU relies heavily on student-generated revenues with enrollment growth in recent years fueling financial gains. Despite flat FTE enrollment growth in fall 2012, between fall 2008 - 2012 total FTE's increased 6.8% (to 16,671, a new record high) largely due to significant FTE growth (10%) at the Worldwide campus (WWC).
WWC's students are largely military/veteran and WWC's growth is attributed to improved program accessibility, targeting working adults and military personnel in varied locations. Federal funding budget cuts for education stipends continue to provide some concern but are offset by ERAU's demonstrated ability to adjust expenses in line with reduced enrollment and maintain positive margin.
Further, Fitch views enrollment growth projections as aggressive but achievable given ERAU's comparatively low cost and niche reputation. ERAU's tuition and fees are the lowest in their peer group and ERAU's Board only adopted a 2% increase in fall 2012, a level it plans to maintain in fiscal years 2013 - 2017. Fitch anticipates flat enrollment in fall 2012 will be offset by modest tuition increases enabling student-generated revenue growth and continued surpluses for fiscal 2013.
Overall, Fitch views ERAU's demand flexibility as relatively sound. Despite the university's high undergraduate acceptance rates, generally more reflective of lower rated institutions, the moderately high matriculation rate and low tuition discounting rate, provide some revenue flexibility and are more in line with the 'A-' rating. Fitch views ERAU's unique niche and advanced job placement will continue to drive demand and minimize student enrollment volatility.
ERAU was established in 1926 as an independent, non-profit, co-educational university. It is the world's oldest and largest university specializing in aviation and aerospace engineering and is accredited by the Southern Association of Colleges.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria' (June 12, 2012);
--'U.S. College and University Rating Criteria' (May 25, 2012)
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria
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