TOTAL OF $104.4 MILLION RATED DEBT OUTSTANDING
Pennsylvania Higher Educational Facs. Auth.
NEW YORK, Jul 29, 2011 -- Moody's Investors Service has affirmed the A3 rating for University of theSciences in Philadelphia's (USciences') Series 2005A and 2008 Bonds issuedthrough the Pennsylvania Higher Educational Facilities Authority. The ratingoutlook is stable.
The A3 rating is based on the University's sound market reputation, conservativefiscal management, healthy balance sheet, conservative debt structure and robustliquidity. The rating also incorporates the University's very distinct marketniche in an increasingly competitive environment, weakening pricing power, highreliance on student charges and significant operational leverage.
*Sound reputation and market niche as 200 year old science andhealthcare focused university in Philadelphia. The University accepted 64.4% ofapplicants in the fall of 2010 with similar selectively expected for the fall of2011
*Consistently strong operating performance providing sound average debt servicecoverage at 2.8 times the last three years (FY2008-2010) with expectations forthis trend to continue
*Good balance sheet support of debt and operations with total cash andinvestments of $175 million (FY 2010) coupled with strong liquidity of resources
*Highly competitive market position indicated by weakening yield on acceptedstudents- at a thin16.1% in the fall of 2010 resulting in a modest decline ofnet tuition revenue in FY2011. The University remains highly reliant on studentcharges at over 83% of total revenues in FY2010.
*Targeted program offerings with over 50% of students enrolled in pharmacyprograms makes the University vulnerable to industry cycles
*High operational leverage with over 1.1 times debt to revenues coupled withmaterial out-year growth in principal repayment requiring continued commitmentby management to maintaining strong cash flow
DETAILED CREDIT DISCUSSION
LEGAL SECURITY: The bonds are secured by a pledge of theUniversity's unrestricted revenues and by a mortgage lien on certain property ofthe University, which includes the Athletic Recreation Center and the McNeilScience and Technology Center. In addition, the University agrees to fix, chargeand collect rates, fees, and charges for the services it provides such that itsunrestricted net revenues, together with any other funds available to pay debtservice, are equal to at least 110% of the current year's debt servicerequirement. The University' also covenants to maintain expendable financialresources as of the end of the fiscal year equal to at least 50% ofoutstanding long-term debt.
INTEREST RATE DERIVATIVES: None- Debt is 100% fixed rate
MANAGEMENT: After 44 years at the University and 16 years as President, thecurrent President is retiring at the end of August 2011. The Board Chair willserve as interim until the search for a new President is completed.
MARKET POSITION: Moody's expects that USciences will continue to serve a solidmarket niche of pharmacy and health science related degree offerings in urbanPhiladelphia, but will remain vulnerable to cyclicality of demand in the relatedindustries as well as emerging competition. The University continues to attractstudents within its niche selecting 64.4% of applicants in the fall of 2010, butfaces stiff competition demonstrated by a declining matriculation rate, at16.1%, down from 29.5% in the fall of 2006. While transfer enrollment is modest,demand is high with selectivity consistently at 15% and yield at 32% in fall2010.
Management attributes the decline in matriculation to weakening of the economyas well as swings in the pharmaceuticals industry. The University is workingwith an enrollment consultant to enhance its performance in this area goingforward. With a robust sticker price, high net tuition per student (at $23,807in FY2010) and significant competition in the east from both private and lowerpriced public institutions, the ability to attract a reliable entering classwith growing net tuition revenue is paramount to maintaining credit strength.Management reported a modest 1% decline in net tuition per student expected forFY2011, but notes that enrollment and financial aid expectations for the fallindicate a moderate increase in both matriculation (projected at about 21%) andnet tuition revenue for the current 2012 fiscal year.
OPERATING PERFORMANCE: Moody's expects that USciences will continue to achievepositive operating results in the coming years despite growing pressure ontuition pricing power. Management, as a result of conservative fiscal practices,has produced healthy operations in recent years with a three year averageoperating margin (FY2008-FY2010) of 7.5%, cash flow at an average of 18.3%, anddebt service coverage at 2.8 times. Strong cash flow will be essential in comingyears given the growth of principal repayment expected, from $1 million inFY2011 to over $2.2 million in FY2014.
While net tuition revenue declined modestly in FY2011 given pressureon discounting and a modest enrollment decline, management projects anotherhealthy operating performance in line with historical results.
BALANCE SHEET POSITION: USciences maintains healthy financial resources andliquidity to support operations and a conservative debt profile, largely builtby retained operating surpluses. At the close of the 2010 fiscal year,expendable financial resources of $116.4 million provided a good cushion tosupport debt at 1.1 times and operations at 1.4 times.
Liquidity is robust at $116.6 million of monthly liquidity, equating to over 1.0times coverage of total debt and over 546 days cash on hand. In addition tomaintaining a healthy operating cash balance of over $17 million, theUniversity's endowment, valued at over $153 million at June 30, 2011,maintains good liquidity with 39% equities, 13% fixed income, 31% total returnand 17% alternatives. For FY2011, the University's endowment had a total returnof 19.6%
The University's debt profile is conservative at 100% fixed rate debt, butoperating leverage is above Moody's median with debt at over 1.1 times annualrevenues. Moody's notes that material additional debt will further leverage theUniversity from an operating standpoint and materially weaken the relativebalance sheet strength that currently anchors the rating in the A category.
The stable outlook incorporates our expectations that the Universitywill maintain at least stable market demand resulting in continued growth of nettuition revenues, that operations will remains strong and that resources willcontinue to provide a strong cushion to support debt and operations.
WHAT COULD MAKE THE RATING GO UP
Material growth of student demand and healthy pricing power; growth of financialresources coupled with increase revenue diversity and limited additional debtissuance
WHAT COULD MAKE THE RATING GO DOWN
Weakening matriculation with pressure on net tuition revenue growth and cashflow; material additional debt issuance
KEY INDICATORS (Fall 2010 enrollment data and FY2010 financial data):
Total Full-Time Equivalent (FTE) Enrollment: 2,720
Selectivity Rate: 64.4%
Matriculation Rate: 16.1%
Expendable Financial Resources: $116.3 million
Total Financial Resources: $157.3 million
Total Direct Debt: $104.4 million
Comprehensive Debt: $115 million
Expendable Financial Resources-to- Pro-Forma Debt: 1.1 times
Expendable Financial Resources-to-Operations: 1.4 times
Monthly Days Cash on Hand: 546 Days
Average three-year operating margin: 7.5%
Series 2005 A & 2008: A3
University: Joseph G. Trainor, C.P.A, Senior Vice President of Finance &Treasurer, (215) 596-8862
PRINCIPAL METHODOLOGY USED
The principal methodology used in this rating was Moody's Rating Approach forPrivate Colleges and Universities published in September 2002. Please see theCredit Policy page on www.moodys.com for a copy of this methodology.
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A-/A3 are medium investment grade credit ratings offered by Moody's and Standard & Poor's. Both ratings signify that the issuer has financial backing and some cash reserves with a low risk of default. A-/A3 is the seventh-highest rating a debt issuer can receive and is four rankings above the cutoff for junk bonds.
For Moody's ratings, use Moodys.com. Select Research & Ratings and choose Look up a Rating. To find upgrades/downgrades, select Research & Ratings, then Ratings News.
In Moody's Investors Service's ratings system, securities are assigned a rating from Aaa to C, with Aaa being the highest quality and C the lowest quality. Moody's was founded by John Moody in 1909 to produce manuals of statistics related to stocks and bonds and bond ratings.
Negative Outlook means that Moody's has indicated that its rating of the Security Issuer may be lowered over the intermediate to longer term.
Description. CRISIL AAA. (Highest Safety) Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.
Currently there are only three companies in the United States with an AAA credit rating: Apple, Microsoft and Johnson & Johnson. These individual codes are grouped into broader classes described as "investment grade" or not, or in numbered tiers from high to low.
Moody's ratings reliably group bonds into similar classes of risk. Investors are primarily concerned with relative value based on their investment horizon, the particular term and conditions of the debt, creditworthiness, pricing and the options that may be included in the bond.
The rating is typically reviewed and restated quarterly, with a full analysis provided annually for higher volume issuers. The three main credit rating agencies are Moody's, Standard and Poor's, and Fitch Ratings.
AAA An obligation rated 'AAA' has the highest rating assigned by S&P Global Ratings. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
B3/B- refers to the letter grades ratings agencies assign to companies, issuers, and securities that are considered speculative and carry a greater degree of risk than investment grade bonds. In the world of junk bonds, a B3/B- rating is about as low of a rating as most investors will accept.
Moody's provides tools that help leaders of organizations understand and process data. From economic forecasts to risk models and software, our solutions help decision makers efficiently identify and act on the most important and relevant information for their business.
RATING OUTLOOK. The stable outlook reflects the expectation of continued economic stability over the medium term, along with the maintenance of adequate financial reserves after planned draws in the coming years.
A Moody's rating outlook is an opinion regarding the likely direction of a rating over the medium term.
Outlooks have a longer time horizon than CreditWatch listings and incorporate trends or risks that we believe have less-certain implications for credit quality. The time frame for an outlook generally is up to two years for investment grade and generally up to one year for speculative grade.
AAA ratings are issued to investment-grade debt that has a high level of creditworthiness with the strongest capacity to repay investors. The AA+ rating is issued by S&P and is similar to the Aa1 rating issued by Moody's. It comes with very low credit risk and indicates the issuer has a strong capacity to repay.
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Higher ratings have shown lower defaults. Our credit ratings have shown strong performance over time as effective measures of relative creditworthiness: Our studies have shown that the higher the ratings, the lower the default rates, and vice-versa.
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Information about missed payments, defaults or court judgments will stay on your credit file for six years. These details are always removed from your credit file after six years, even if the debt itself is still unpaid.
Table 1. An obligation rated 'AAA' has the highest rating assigned by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is extremely strong. An obligation rated 'AA' differs from the highest-rated obligations only to a small degree.
When the bond is downgraded from say AAA to AA+, the investors want an interest rate that a company with low rating will pay. That makes them adjust the price in secondary market. In that case the yield rises.
Standard & Poor's (S&P) is a company, a leading index provider, and data source of independent credit ratings. The name comes from the 1941 merger of two financial data publications. Henry Varnum Poor's publication on railroad prices (dating back to 1860), and The Standard Statistics Bureau, which was founded in 1906.
Key Takeaways. Aa2 is the third-highest long-term credit rating that Moody's assigns to high-quality fixed-income securities with very low credit risk. The letters, "Aa" in this case, represent the generic rating classification, while the number, "2" in this case, refers to the standing within this classification.
Moody's uses the term A1 to indicate the safety of long-term (over one year) credit obligations. Moody's uses the term A to indicate obligations with low credit risk. In addition to the letter grade, Moody's adds a 1, 2, or 3 to the letter with 1 being a higher grade and 3 being a lower grade.
Moody's assigns its B3 rating for “obligations considered speculative and subject to high credit risk.”1 Entities that receive this rating may be experiencing financial instability or hold inadequate cash reserves relative to their business needs, debt or other financial obligations.
AAA An obligation rated 'AAA' has the highest rating assigned by S&P Global Ratings. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.