[February 07, 2014]

Fitch Rates Montclair State University, New Jersey Revs 'AA-'; Outlook Stable

Fitch ratings has assigned an 'AA-' rating to approximately $185 million of series 2014 New Jersey Educational Facilities Authority (NJEFA) revenue bonds issued on behalf of Montclair State University (MSU).

The bonds are expected to be sold via negotiation on or about the week of Feb. 24. Proceeds will be used to fund the construction and renovation of certain capital projects, improve existing technological infrastructure, fund capitalized interest, refund certain outstanding bonds, and pay associated costs of issuance.

In addition, Fitch affirms the long-term rating on approximately $328.6 million of outstanding NJEFA revenue bonds issued on behalf of MSU.

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of the university.

KEY RATING DRIVERS

ATYPICALLY HIGH LEVERAGE AND DEBT BURDEN: MSU's debt burden and leverage metrics are not in line with the 'AA' rating category. However, Fitch recognizes the need for debt-funded initiatives given the fact that New Jersey colleges and universities have historically received limited capital support from the state, and believes that the projects will ultimately benefit MSU's credit profile. Further, management's proven ability to maintain good debt service coverage figures while dramatically growing its campus infrastructure in recent years, the meaningful growth in balance sheet resources to accommodate additional debt, and the absence of further debt plans over the near term mitigate debt-related concerns.

STEADY OPERATING PERFORMANCE: Over the past five fiscal years, MSU's GAAP-based operating margins have been consistently positive, fueled by enrollment growth, increases in student charges, and prudent expense management. MSU receives state operating appropriations that have been relatively flat in recent years and continue to contribute to a smaller share of the overall budget. MSU's competitive pricing position and the absence of a cap on tuition rates are viewed as credit strengths, although pricing flexibility is somewhat limited by its mission to serve as an affordable educational option to state residents.

HEALTHY STUDENT ENROLLMENT TRENDS: MSU maintains a healthy market position as the second largest postsecondary institution in New Jersey (on a headcount basis), with undergraduate and graduate programs offered across a range of disciplines. Total headcount enrollment has grown by a healthy 7.1% over the past five years, to 19,464 in fall 2013. Fitch considers student demand to be one of the primary determinants of MSU's long-term viability.

EXPERIENCED LEADERSHIP: In general, management has held a long tenure at MSU and significant experience in higher education administration. Management has demonstrated effective financial and budgetary controls, guided by a strategic plan with defined institutional goals that undergo formal periodic reviews. Fitch views favorably management's focus on enhancing MSU's visibility, reputation, and fundraising prowess.

RATING SENSITIVITY

DEBT MANAGEABILITY: Rating stability is predicated on the maintenance of debt service coverage near existing levels. Issuance of additional debt without a commensurate growth in financial resources and revenues would yield negative rating pressure.

CREDIT PROFILE

MSU is a public research university with its main 252-acre campus divided between the town of Montclair in Essex County and the municipalities of Little Falls and Clifton in Passaic County. The university also operates the New Jersey School of Conservation, a 240-acre environment education and research center in Stokes State Forest (Sussex County). In June 2012, the university's accreditation by the Middle States Commission on Higher Education was reaffirmed for a 10-year term.

ATYPICALLY HIGH LEVERAGE AND DEBT BURDEN

The series 2014 transaction represents a significant increase in total outstanding debt; however, Fitch notes that meaningful growth in the university's balance sheet resources over the past few years has increased MSU's capacity to absorb the added debt load. Available funds, defined by Fitch as cash and investments less certain restricted net assets, totaled around $165 million in fiscal-year end 2013, or 9.6% over the prior year and 22.9% above fiscal2009 levels. The ratio of available funds-to-pro forma long-term debt ($485 million, including other types of debt such as notes payable and capital leases) was 34%, which is on the lower end of Fitch-rated public colleges and universities in the 'AA' category. Fitch notes that public colleges and universities with a stronger available funds-to-debt ratio tend to receive significant state support for capital expenditures.

Some comfort related to the university's high leverage position is provided by management's demonstrated ability to generate steady funds in support of debt service while undertaking sizeable capital projects. Between fiscal years 2009 and 2013, net investment in property, plant and equipment increased by a sizeable 70.5% while net income available for debt service remained relatively steady, ranging from $57 million to $62.7 million over the same time period (yielding healthy pro forma maximum annual debt service [MADS] coverage levels that have ranged from 1.7x to 1.9x).

Further, while the preliminary pro forma MADS figure represents a high 9.6% of fiscal 2013 unrestricted operating revenues, Fitch notes that a significant portion of the new money portion associated with the series 2014 transaction (approximately 61%) will be allocated toward growth programs at MSU, namely business, science, and communication/media. Fitch believes this strategic decision bodes well for total revenue growth, which, in the absence of debt plans over the next one to three years, should allow the university's debt burden to moderate over time.

A privatized on-campus student housing project that opened in fall 2011 continues to register favorable occupancy results (near 100% in fall 2013). Since the project was financed with debt that is nonrecourse to the university, Fitch does not include the debt associated with the project (approximately $210 million; not rated by Fitch) in its calculation of long-term debt. Fitch would consider the project to be on credit if the residence hall, which is a strategically important for MSU, required financial support.

STEADY OPERATING PERFORMANCE

The operating margin for fiscals 2009-2013 has averaged 7.2%, including 4.4% in the most recent fiscal year. Fitch expects the operating margin for public colleges and universities to be break-even on a GAAP basis. MSU's impressive operating performance reflects strong revenue growth despite a flat state funding environment and the management team's financial expertise and consistent monitoring of the budget. Fitch notes state funding remained effectively flat in fiscal 2014; however, enrollment growth coupled with further adjustments in the rate structure, including a 2.4% increase in undergraduate tuition/fees, is contributing to forecasted growth in total revenues.

Given the university's declining, but still significant, reliance on state funding for operations (21.8% of unrestricted operating revenues in fiscal 2013), a significant reduction in state funding for MSU could have a negative effect on the financial strength of the university. Fitch notes, however, that the university maintains a satisfactory level of unencumbered resources to help it manage through short-term financial difficulties (the ratio of available funds-to-operating expenses in fiscal 2013 was 49.4%).

HEALTHY STUDENT ENROLLMENT TRENDS

Fitch considers student demand to be one of the primary determinants of the university's long-term viability. Between fall 2009 and fall 2013, total headcount increased 7.1%, to 19,464 in fall 2013. The increase for fall 2013 was supported by the largest incoming freshmen class in MSU's history and helped the university reach 97.3% of its goal to enroll 20,000 students by 2016.

In general, freshmen and transfer application volume, selectivity, and matriculation rates have remained steady, which is particularly important, since approximately 80% of students are undergraduates. Graduate headcount figures have remained stable over the past five years, and are expected to benefit from new marketing initiatives.

Fitch notes that the university continues to face competition for students, which includes nearby public universities and other institutions; however, MSU's competitive tuition and fee rates remain a key strength for student recruitment. For academic year 2013-14, the university's tuition/fees for in-state undergraduate students were among the lowest relative to other four-year colleges and universities in New Jersey. Fitch believes that the university's significant investment in its infrastructure, which was undertaken in part to accommodate increased student growth, will help to bolster its competitive position.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

'U.S. College and University Rating Criteria', dated May 2013

'Fitch Affirms Montclair State University, New Jersey Revs at 'AA-'; Outlook Stable, dated May 9, 2013'

'2012 Median Ratios for U.S. Public Colleges and Universities, dated September 5, 2013'

'Fitch Rates New Jersey's $350MM GO Bonds 'AA-'; Outlook Stable' dated April 19, 2013.

Applicable Criteria and Related Research:

2012 Median Ratios for U.S. Public Colleges and Universities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715980

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820058

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