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Rating Update:

MOODY'S AFFIRMS Baa1 RATING ON WENTWORTH INSTITUTE OF TECHNOLOGY'S (MA) SERIES 2008 BONDS; OUTLOOK REMAINS NEGATIVE

04 May 2011

WENTWORTH HAS $90.1 MILLION OF RATED DEBT OUTSTANDING

Massachusetts Development Finance Agency
Higher Education
MA

Opinion

NEW YORK, May 4, 2011 -- Moody's Investors Service has affirmed the Baa1 underlying rating on Wentworth Institute of Technology's ("Wentworth" or "Institute") Variable Rate Demand Revenue Refunding Bonds, Series 2008 issued through the Massachusetts Development Finance Agency. The rating outlook is negative. Moody's also maintains ratings on outstanding debt based on support provided by irrevocable direct-pay letters of credit as listed in the RATED DEBT section.

SUMMARY RATING RATIONALE: The Baa1 rating incorporates Wentworth's market position as an urban technical design and engineering college located in Boston, consistently healthy operating performance, and heavy reliance on tuition revenue. The negative outlook is driven by pressure on the college's primary revenue source, student charges, due to failure to meet enrollment targets and elevated tuition discounting. The negative outlook also incorporates the operational and liquidity risks associated with its debt structure and high balance sheet leverage.

STRENGTHS

*Market niche as an urban technical oriented college known for programs in architecture, engineering, and construction management as well as a co-op program located in the vibrant Longwood and Fenway area of Boston. Member of the collegiate consortium Colleges of the Fenway which allows the institutions to collaborate and share resources.

*Consistently strong cash flow and healthy debt service coverage. The FY 2010 operating cash flow margin was 23.9%, providing healthy debt service coverage of 4.3 times. The Institute is projecting a positive operating surplus for FY 2011.

*History of consistent growth of net tuition revenue and net tuition per student have grown at a healthy pace due primarily to increases in tuition charges over the last four years. Total net tuition revenues increased by 27% since fiscal 2006, while net tuition per student, at $21,334, increased by 15.9% during the same period. Moody's notes that there is pressure on student recruitment as evidenced by the drop in student enrollment by 136 freshman students (fall 2010 versus fall 2009) and increase in tuition discounting.

CHALLENGES

*Pressure on the Institute's primary source of revenue, student charges due to enrollment shortfalls and increased tuition discounting. Wentworth relies on student charges for 92.4% of Moody's adjusted operating revenue.

*Debt structure adds risk with all debt in variable rate mode with a tender feature. Letters of credit supporting the debt contain termination events and covenants which, if breached, could result in a mandatory tender of the variable-rate demand bonds. It could also result in a call on the Institute's liquidity to repay the bank over a timeframe that is much shorter than the original schedule. Monthly liquidity of $75.1 million covers debt by a thin 0.83 times as on June 30, 2010.

*High balance sheet leverage with FY 2010 expendable financial resources of $59.3 million providing a thin 0.66 times coverage of debt.

DETAILED CREDIT DISCUSSION

LEGAL SECURITY: Debt service payments are a general obligation of the Institute, secured by its unrestricted revenues. Other security features include a negative pledge on the Core Campus.

INTEREST RATE DERIVATIVES: Wentworth maintains $66.9 million notional amount of swaps as hedges against interest rate fluctuation on $90.1 million of variable rate debt currently outstanding. All swaps are floating-to-fixed, with the Institute paying a fixed rate ranging from 3.30% to 3.615% and receiving 67% of one-month LIBOR. The counterparties for these swaps are Morgan Stanley Capital Services (guaranteed by Morgan Stanley, rated A2/P-1; $ 39.6 million notional), Wells Fargo Bank, N.A. (formerly Wachovia Bank, N.A., rated Aa2/P-1; $13.4 million notional), and Bank of New York Mellon (rated Aaa/P-1, $13.9 million notional). Wentworth can terminate each swap at any time at market value with specified notice. The Morgan Stanley and Bank of New York swaps require the Institute to post collateral based on various rating levels and threshold values. For the Morgan Stanley swap, the Institute is required to post collateral for any incremental amount over a $10 million mark to market threshold; however, the counterparty cannot terminate the swap or require additional collateral even if the Institute is downgraded below Baa3. As of December 31, 2010, the value of the swap to Wentworth was negative $4.8 million. For the Bank of New York Mellon swap, Wentworth must post collateral at the full negative value of the swap to the Institute if its rating is below Ba1/BB+ or if it ceases to be rated by either Moody's or S&P. As of December 31, 2010, the value of the swap to Wentworth was negative $1.78 million. The value of swap with Wells Fargo Bank, N.A was negative $1.2 million as of December 31, 2010.

DEBT STRUCTURE: All of Wentworth's $90.1 million of outstanding debt is in the weekly variable rate mode with a put feature. The Institute relies on letters of credit (LOC) from two banks to support its debt. The $28.3 million outstanding Series 2008 bonds are supported by a letter of credit from RBS Citizens, N.A. (rated A2/P-1,with a negative outlook) that expires December 10, 2013. Under the RBS Citizens LOC, the Institute would have up to the earlier of the termination date or 10 years to repay any advance from the bank to purchase bonds that were not remarketed. The bank can require acceleration or mandatory tender of the bonds and immediate repayment of any amounts owed to the bank within 10 days of notice to Wentworth or the Trustee if the Institute fails to meet a debt service coverage ratio of 1.25 times at each June 30 and December 31 (2.88 times at December 31, 2010), is involved in certain bankruptcy events, defaults on Indebtedness in excess of $1 million, or is subject to judgments or attachments in excess of $1 million that remain unstayed for 30 days. The Series 2007A and 2007B bonds totaling $61.8 million are supported by a letter of credit from JPMorgan Chase Bank, N.A. (rated Aa1/P-1) that expires November 30, 2013. Under the JPMorgan LOC, Wentworth would have three years to repay an advance from the bank to purchase bonds that were not remarketed. The bank can require acceleration or mandatory tender of the bonds and immediate repayment of any amounts owed to the bank if Wentworth fails to meet a debt service coverage ratio of 1.25 times at each June 30 (4.4times at June 30, 2010) or a liquidity ratio of at least 0.75 times (1.0 times at June 30, 2010), defaults in the payment of Indebtedness of at least $250,000, or a final judgment against Wentworth for at least $200,000 remains in effect for 45 days.

RECENT DEVELOPMENTS / RESULTS:

Student market: The Institute experienced modest enrollment decline in fall 2010 with total FTE (Full time equivalent) at 2,812 as compared to 2,897 in fall 2009. The decline is driven by a shortfall in the fall 2010 incoming class, with approximately 90 students fewer than the prior year. Management attributes the drop in enrollments to a combination of course offerings not meeting student demand and inadequate financial aid. To counter this, the Institute reports introducing new undergraduate programs (fall 2011) in technology and engineering and graduate programs (fall 2012) in Facilities Management and Civil Engineering. Additionally, Wentworth reports to have increased discounting to 26.8% in fall 2011 from 24.8% in fall 2010. Preliminary application data, as on April 29, 2011 suggests fall 2011 freshman applications to be highest till date with total deposits at 725 versus 572 last year. Net tuition per student continued to increase at a healthy pace with compounded annual growth of 3.76% for the last four years. The management is considering moving to a high tuition with high discounting format in the next couple of years. Management believes that the perceived value of a high sticker price along with quality programs will attract more students.

Operating Performance: Management projects FY2011 operations to be favorable, but modestly thinner than the prior year due to expenses associated with new faculty (for new courses) and a drop in FTE enrollment. Despite a shortfall of 136 freshmen students in the incoming class, projected net tuition revenue for FY 2011 is at $61.9 million versus $61.8 million for FY 2010. The Institute is planning to join 20 other institutes in Massachusetts to bring down its health care costs by leveraging economies of scale. The enrollment fee for this consortium is $50,000 which will be refunded in three years.

Endowment: The fiscal 2011 year to date estimated endowment return ending February 28, 2011 is a favorable 17% compared to the fiscal 2010 return of 4.3%. The fiscal 2010 return was low due to a $3.5 million unrealized loss on an investment in Commonfund Real Estate. As of February 28, 2011, the endowment was allocated as follows: 53% traditional equities, 14.5% fixed income, 22.3% hedge funds and private equity, 10.1% in inflation hedging, and 0.1% in liquid capital. According to Moody's calculations, at the end of fiscal 2010 Wentworth held $75.1 million of unrestricted cash and investments that could be liquidated within one month which covered all demand debt by a thin 0.83 times and a strong 384 days of operating expenses.

Outlook

The negative outlook reflects pressure on student enrollment and net tuition revenue, aggressive debt structure that includes termination events and covenants which, if breached, could result acceleration of debt, and high financial leverage.

WHAT COULD MAKE THE RATING GO UP

Strengthened student market position as demonstrated by stable enrollment and growth of net tuition revenue, continued healthy operating performance, improved balance sheet and liquidity to better support debt and variable rate demand debt.

WHAT COULD MAKE THE RATING GO DOWN

Sustained deterioration of student market position, narrowing liquidity relative to demand debt, additional borrowing without commensurate growth of financial resources, breach of covenants under letter of credit agreements,

KEY INDICATORS (FY 2010 financial data and fall 2010 enrollment data)

Total Full-Time Equivalent Students (FTE): 2,812 students

Selectivity: 58.4%

Matriculation: 25.8%

Total Financial Resources: $70.7 million

Total Direct Debt: $90.1million

Monthly Liquidity: $75.1 million

Expendable Financial Resources to Direct Debt: 0.66 times

Expendable Financial Resources to Operations: 0.71 times

Average Operating Margin: 4.9%

Average Debt Service Coverage: 3.5 times

Monthly Days Cash on Hand: 384 days

Monthly Liquidity to Demand Debt: 83.3%

Tuition and Auxiliary Revenue (% of Operating Revenue): 92.4%

RATED DEBT

Series 2008: Baa1 underlying; Aa3/VMIG 1 based on letter of credit provided by RBS Citizens, N.A. (expires 12/10/2013)

Series 2007A and 2007B: Aa1/VMIG 1 based on letter of credit provided by JPMorgan Chase Bank, N.A. (expires 11/30/2013)

CONTACTS

Wentworth Institute of Technology: Robert Totino, Vice President for Finance, 617-989-4325

PRINCIPAL METHODOLOGY USED

The principal methodology used in this rating was Moody's Rating Approach for Private Colleges and Universities published in September 2002.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Pranav Sharma
Analyst
Public Finance Group
Moody's Investors Service

Karen Kedem
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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MOODY'S AFFIRMS Baa1 RATING ON WENTWORTH INSTITUTE OF TECHNOLOGY'S (MA) SERIES 2008 BONDS; OUTLOOK REMAINS NEGATIVE
No Related Data.
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