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Fitch Upgrades Midland University, NE's Revs to 'B+'; Outlook to PositiveFitch Ratings has upgraded the rating on Midland University, NE's (MU) $8.3 million of outstanding series 2004A revenue bonds issued by the Nebraska Educational Finance Authority to 'B+' from 'B'. Fitch does not rate MU's series 1998 or 2003 bonds. However, Fitch's analysis considers the university's $15.8 million of total outstanding debt. The Rating Outlook has been revised to Positive from Stable. SECURITY MU's obligation to make payments to the authority pursuant to a loan agreement and promissory note is absolute and unconditional. The university pledges its gross revenues for such purposes. The authority pledges its interest in the MU loan agreement to the trustee. The authority issued the bonds and loaned the proceeds to MU. A cash-funded debt service reserve for the series 2004A bonds totals $816 thousand, as of May 31, 2014. KEY RATING DRIVERS INCREASING OPERATING STABILITY: The rating upgrade reflects MU's increasing operating stability evidenced over the past three years. Continued balance sheet improvements, including the ongoing repayment of endowment fund loans, could contribute to additional positive rating action in the next two years. POSITIVE OPERATING MARGINS: Positive operating margins in each of the past three years are a marked improvement from a decade of negative results that caused the university severe financial distress. A doubling of net tuition revenues and fees since fiscal 2010, due in large part to continued enrollment gains, has created greater overall stability. ENROLLMENT GROWTH: Headcount has approximately doubled over the past five years to 1,382 students, including 5.7% year-over-year growth in fall 2014. This reverses a one-third decline the prior five years. Expanded graduate programs, a high school scholar program, and possibly a larger footprint fuel MU's growth plans. LIQUIDITY LIMITS FLEXIBILITY: Balance sheet resources, while improved, remain weak and limit the university's overall financial flexibility. Moreover, high tuition discounting could slow the rate of improvement in available funds. Favorably, MU began repaying sizable operating loans from its endowment fund in fiscal 2014. RATING SENSITIVITIES FINANCIAL IMPROVEMENT AND STRATEGY: Continued improvements in MU's financial metrics, particularly its available funds ratios, together with enrollment gains and a clearly defined growth strategy, could lead to additional positive rating action in the next two years. ENDOWMENT FUND REPAYMENT: A pause in the repayment of its endowment fund loans could signal financial stress that ultimately limits additional positive rating action. CREDIT PROFILE Founded in 1883, MU is a private, co-educational liberal arts university located in Fremont, Nebraska, approximately 30 miles northwest of Omaha. The university primarily serves undergraduate students, but it expanded masters programs in education and professional accounting to include business administration in recent years. MU is affiliated with the Evangelical Lutheran Church in America. Ms. Jody Horner will become MU's 16th president next month after the former president, Mr. Ben Sasse, won election to the U.S. Senate. The MU Board of Directors selected a candidate to help affect a growth strategy. The change in leadership caused the university to pause a possible expansion onto the closed Dana College's Blair campus. STABILIZING OPERATING MARGINS MU's financial position has stabilized and its enrollment picture has improved after a period of severe financial distress five years ago. Positive operating margins in each of the past three years are a reversal of losses spanning the prior decade. The fiscal 2014 adjusted margin (+0.9%) provides some comfort that MU can sustin balanced operations, as more stable net tuition revenues bolstered results that year. Such revenues have doubled since fiscal 2010 with measured rate increases and a slightly more than doubling of headcount during the period to 1,382. In addition, operating expense growth has been about half that of operating revenues. Nonrecurring gifts and grants, which contributed handily to fiscal 2012 and 2013 margins, halved from the prior year to historical levels in fiscal 2014 after the fundraising pause. Fiscal 2014 debt service and MADS coverage totaled 1.6x and 1x, respectively, continuing a three-year positive trend. ENROLLMENT GROWTH Favorable demand trends have benefitted tuition revenues and operating margins, as noted. MU's ability to realize continued enrollment growth is critical to its credit profile, given its dependence on student-generated fees (86% in fiscal 2014). Enhanced offerings and aggressive marketing are driving demand, including a new MBA program begun three years ago; a successful RN to BSN program for nursing; and undergraduate recruitment efforts, including a high school scholar program and four-year "graduation guarantee" initiative. Moreover, MU expects to improve student retention and graduation rates by utilizing predictive software and frequent staff interaction. Proposed expansion plans onto the Blair campus could bring enrollment to 1,800-2,000 over time. A clear strategy to maintain growth while continuing to improve the university's financial position will be an important consideration of future rating actions. SLOWER BALANCE SHEET IMPROVEMENTS MU's balance sheet strengthening is likewise evident. In addition, internal loan repayments to its restricted endowment fund are a positive indication of MU's improving financial health. However, total resources remain weak and improvements will likely be incremental. A high tuition discounting rate limits available funds growth. Available funds improved to $4.8 million in fiscal 2014 from -$1.2 million and $960 thousand in fiscal years 2012 and 2013, respectively. Nevertheless, the ratios of available funds to operating expenses (21.4%) and total debt or debt-like obligations (19.6%) remain low, despite being much improved. Outstanding debt includes $15.8 million of fixed-rate bonds in three series. The MADS burden ($2.3 million, 2029) remains high at 10.2% of unrestricted operating revenue, but average annual debt service is little changed at approximately $1.5 million through 2028. Total debt or debt-like obligations, including endowment fund loans, is closer to $25 million. ENDOWMENT FUND REPAYMENT Continued progress toward a goal of fully repaying endowment fund loans by 2024 will be an important factor in subsequent rating reviews. Stagnant enrollment several years ago contributed to structural deficits that the university bridged with increased support from its endowment fund and the use of short-term note obligations. This reduced critical operating flexibility for an institution with essentially one concentrated revenue source. MU reduced its endowment fund loan balance by $300 thousand in fiscal 2014. MU's internal borrowing from its permanently restricted endowment pool peaked at $7.9 million in fiscal 2013. The endowment totals $18.5 million (fiscal 2014); long-term investments equal $10.8 million and operating fund loans equal $7.6 million. EXPANSION PLANS Part of MU's longer-term growth strategy includes a possible expansion to the now closed Dana College's Blair campus to service a combined 1,800-2,000 students. MU leased the campus from a third-party developer in July 2013. The lease extends through June 2018 with the option to purchase begun in August 2014. The lease also includes a five-year extension option to June 2023. MU had expected to open the campus in fall 2016 at Fitch's prior review in February 2014. MU rents the facilities for $10/annually and covers maintenance and other costs via a triple net lease. The fiscal 2014 net expense was approximately $900 thousand. The most recent estimate of deferred maintenance is approximately $11 million, which would be funded through contributions, not additional debt. High leverage ratios limit MU's capacity to debt-finance its expansion plans. MU management expects to push forward Dana planning with the arrival of Ms. Horner this year. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'U.S. College and University Rating Criteria' (May 2014); --'Fitch Affirms Midland University, NE's Revs at 'B'; Outlook Stable' (Feb. 2014). Applicable Criteria and Related Research: U.S. College and University Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978613 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. |
