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Fitch Rates Coastal Carolina University (SC) Higher Ed Revs 'A+'; Outlook StableNEW YORK --(Business Wire)-- Fitch Ratings assigns an 'A+' rating to approximately $36.6 million of higher education revenue bonds, series 2014 issued by Coastal Carolina University (CCU, or the university). The fixed-rate bonds are expected to sell competitively on or around May 21. Bond proceeds will be used to fund construction of the second phase of an on-campus student housing facility (the project), fund capitalized interest, and pay costs of issuance. At the same time, Fitch affirms the 'A+' rating on CCU's approximately $54.7 million of outstanding higher education revenue bonds, series 2013. The Rating Outlook is Stable. SECURITY The bonds, which rank on parity with CCU's outstanding revenue bonds, are a special limited obligation of CCU, payable solely from and secured by a pledge of net revenues. Pledged revenues include all revenues of the university except revenues derived from appropriations received from the general assembly of the state and institution tuition moneys collected to pay debt service on state institution bonds (rated 'AAA' by Fitch Ratings) issued on behalf of the university. KEY RATING DRIVERS POSITIVE OPERATIONS: CCU's 'A+' rating primarily reflects consistently positive, albeit declining, operating results that are driven by stable to growing enrollment; and an adequate balance sheet cushion. These strengths are offset by an atypically high reliance on student-generated revenues and an increasing pro forma debt burden. STABLE STUDENT DEMAND: Enrollment has grown steadily over the past several years as demand has remained strong from both in- and out-of-state applicants. The university's revenue mix benefits from out-of-state tuition levels which are instrumental in generating consistently positive margins. HIGH DEBT BURDEN: CCU's track record as an independent state institution is limited and, in the course of maturing, may require on-going investment in facilities and programs, portions of which may be debt-financed. While financial leverage increased significantly in recent years and CCU maintains a high pro forma debt burden, most debt-financed projects have been related to student housing that is expected to be self-supporting. LIMITED STATE SUPPORT: While state appropriations are not a significant source of operating revenue, resulting in CCU's high tuition dependency for a public institution, management has successfully managed through cycles of state cuts (South Carolina GOs rated 'AAA' by Fitch) with steady enrollment growth and periodic tuition and fee increases. Moreover, CCU benefits from a local optional penny sales tax which provides an additional, steady source of income to fund capital needs. RATING SENSITIVITIES ADDITIONAL DEBT: Based on CCU's limited balance sheet cushion relative to outstanding financial leverage and high pro forma debt burden, Fitch considers the university's additional debt capacity as limited and Fitch would expect any additional indebtedness to require a corresponding increase in unrestricted financial resources in support of the obligations. OPERATING MARGIN STABILITY: Rating stability is also predicated upon CCU's ability to maintain positive operations, thereby generating adequate debt service coverage and offsetting its increased leverage position. CREDIT PROFILE CCU, located in Conway, near Myrtle Beach, SC, was founded in 1954 by Horry County citizens as a two-year college under the College of Charleston. In 1958, benefitting from a tax levy referendum, CCU became a campus of the University of South Carolina system (revenue bonds rated 'AA' by Fitch) and subsequently started awarding four-year baccalaureate degrees in 1974. CCU became an independent state supported institution in 1993. CCU offers undergraduate degrees in 65 fields of study, seven master degree programs and one doctoral program. ENROLLMENT GROWTH DRIVES OPERATIONS Headcount, as a result of sustained demand, has increased over the past several years. Fall 2013 headcount totaled 9,478 students, up 1.5% from fall 2012 and up 13.4% since fall 2009. Full-time equivalent enrollment increased to 8,870, up 12.8% over the same five-year period. Freshmen applications to CCU have increased substantially as well, with the university's acceptance and matriculation rates averaging about 72% and 27%, respectively. Due to enrollment growth over the past several decades and CCU's transition to a traditional four-year institution, the university has been investing in student housing. Approximately 36% of total headcount presently resides on campus, with freshmen and sophomores required to live on campus. Based on historical enrollment growth as an indicatr for student housing demand, CCU undertook the project that will add a total of 1,274 on-campus beds by fall 2016. Fitch also notes that CCU's traditional student mix includes 46% of out-of-state students (above average for a public institution) and acknowledges the favorable effect of this mix on CCU's financial performance. While CCU's resident tuition remains below the state average ($9,760 vs. $10,467), management remains conscious of student affordability and has kept undergraduate resident tuition flat for the past three years (fall 2011 to fall 2013). However, tuition is expected to increase slightly for the 2014-2015 academic year. The university is supported by a property tax millage within Horry County (GOs rated 'AA+' by Fitch) and by a portion of a county-wide local option sales tax collected through fiscal 2024, which mitigated the impact of state funding cuts in recent years. However, state appropriations increased slightly in fiscal 2013 due to non-recurring funds for investment in CCU's new doctoral program. Positive operations are somewhat tempered by the university's high reliance on tuition, fees and auxiliary revenues for operating support (70% in fiscal 2013), which is relatively high for a public institution. State appropriations represented a low 6.5% of total operating revenues in fiscal 2013. CCU's ability to generate consistent surpluses is reflected by an average operating margin of 10.9% over the past five fiscal years (2009-2013); 2.9% in fiscal 2013. The decline in fiscal 2013 performance was largely attributed to CCU taking on a triple-net, 30-year capital lease for University Place (UP) from the CCU Student Housing Foundation (the foundation). UP is a 2,100-bed student housing complex owned by the foundation and located a half mile away from CCU's campus. The complex is now managed by CCU as part of its overall housing system and remains fully occupied. Starting in fiscal 2013, the revenues and expenses associated with the facility were transferred to CCU's financial reporting; notably, rental revenue and related expenses such as interest, depreciation and utility costs. Importantly, Fitch notes that UP is expected to remain self-supporting. At the end of the lease, CCU has the option to purchase the facility from the foundation for $1, which Fitch views favorably. Due to the absorption of the operations of UP, Fitch expects CCU's operating margin to remain approximate to current levels going forward. Management noted that they anticipate the university's fiscal 2014 operating margin to be similar to the fiscal 2013 level. ADEQUATE FINANCIAL CUSHION TEMPERED BY HIGH DEBT BURDEN Balance sheet resources remain limited but adequate for the rating category. Available funds, calculated as total cash and investments less non-expendable restricted net assets, totaled $78.4 million as of June 30, 2013 and represented an adequate 47.3% of fiscal 2013 operating expenses ($166 million), but a low 24.5% of pro forma debt (approximately $320 million). Debt includes university revenue bonds (about $108 million on a pro forma basis), state institution bonds ($62.6 million), and the UP capital lease ($148 million). CCU's modest balance sheet cushion is partially offset by its historically solid, albeit declining, operating margin. The decline in the margin over the past few years is partly attributed to reduced state appropriations, in conjunction with the university's tuition freeze. Revenue bonds are all fixed-rate debt, with a somewhat front-loaded pro forma debt service schedule, which Fitch continues to view favorably. Total pro forma MADS occurs in fiscal 2018 at about $24 million, with average annual debt service (AADS) totaling about $16.5 million. CCU's pro forma debt burden remains high, with MADS consuming 14.1% of fiscal 2013 operating revenues ($170.1 million). Fitch considers a debt burden of 10% and above as high for colleges and universities. The AADS burden is slightly more manageable at 9.7%. Partially offsetting the high burden is CCU's consistent generation of adequate MADS coverage from net operating income. MADS coverage was at or just above 1x in each of the past four fiscal years, including in FY13. AADS coverage was a sound 1.4.x in fiscal 2013. Importantly, as discussed above, CCU's debt-financed housing facilities are expected to be self-supporting, also partially mitigating concern over the university's high debt burden. Management has cited no significant capital needs beyond the series 2014 project, which Fitch views favorably. CCU intends to save the annual revenues it receives from its share of the Horry County sales tax (expected to raise a total of $132 million from 2009 - 2023) to fund future capital expenditures, as well as cash on hand and fundraising. Based on CCU's limited balance sheet cushion relative to outstanding financial leverage and high pro forma MADS burden, Fitch considers CCU's additional debt capacity as very limited at the current rating level. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria' (June 3, 2013); --'U.S. College and University Rating Criteria' (May 10, 2013); --'Coastal Carolina University, South Carolina' (Feb. 8, 2013); --'Fitch Rates South Carolina's $146MM GOs 'AAA' (Nov. 19, 2013); --'Fitch Affirms Horry County, SC's GO Bonds 'AA+'; Outlook Stable' (Oct. 2, 2013). Applicable Criteria and Related Research: Revenue-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499 U.S. College and University Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049 Coastal Carolina University, South Carolina http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=701271 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=829068 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. |
