COLLEGE WILL HAVE $279.3 MILLION OF DEBT OUTSTANDING
Massachusetts Development Finance Agency
Fixed Rate Revenue Bonds, Series 2011
Expected Sale Date
Private College Revenue Bonds
NEW YORK, Aug 3, 2011 -- Moody's Investors Service has assigned A2 rating to Berklee College of Music
(MA)'s ("College") $90 million series 2011 fixed rate revenue bonds to
be issued through the Massachusetts Development Finance Agency and affirmed the
A2 rating on the series 2007A bonds. The outlook is stable.
The A2 rating reflects the College's strong market position as a
leading institute of contemporary music, consistently high cash flow
margins, all fixed rate debt structure, and strong management. The rating also
considers the College's projected operating performance for FY 2011 which is
better than that in FY 2010. The College's proforma debt will be high from both
a balance sheet and operating leverage, and affirmation of the rating heavily
incorporates an assumption of continued strong operating performance and student
*Solid market niche as a leading provider of music education focused on
contemporary music. The College's relatively high matriculation ratio, averaging
54.6% over the past five years, highlights the self-selecting nature of the
applicant pool and the strong market reputation.
*Consistently strong operating performance, driven by growth in net tuition
revenue, contributing to our expectations that the College will maintain strong
debt service coverage even after incorporating the impact of series 2011 bonds.
*Healthy gift revenue in recent years as the College successfully completed its
first ever capital campaign, raising $54 million. Three-year average annual gift
revenue through FY 2010 was $9.2 million.
*Marketable real estate in Boston, the potential value of which is not reflected
in Moody's financial ratios, but is factored into the rating. While these
facilities are important in supporting the College's educational activities,
they could be sold over time if Berklee were to enter into an extended period of
financial stress. The College's ability to tap these real estate holdings
provides a material credit distinction from most other higher education
*Highly leveraged at the current rating level. Moody's believes that with the
issue of series 2011 bonds, FY 2010 expendable financial resources of $102.6
million provide thin proforma debt coverage of 0.37 times and pro forma debt to
revenue increases to 1.71 times.
*Concentrated revenue base with student charges (tuition and
auxiliary) contributing 88.3% of the total operating revenues in FY 2010,
although tuition is diversified across different programs including on-line
programming and summer classes.
*Operating performance could be pressured in the near-term due to the expenses
associated with the new student housing facility which management projects will
generate positive cash flows from FY 2016 onwards. Additionally, the College is
currently absorbing the annual operating expenses associated with the campus in
Valencia, Spain of about $1 million.
DETAILED CREDIT DISCUSSION
USE OF PROCEEDS: The proceeds will be used to construct a student residence hall
(369 beds), dining facility, music performance venue, and pay cost of issuance.
The project is projected to open in FY 2014.
LEGAL SECURITY: The Series 2007 and 2011 bonds are secured by the unsecured
general obligation of the Institution. The bonds do not have debt service
DEBT RELATED DERIVATIVES: None.
DEBT STRUCTURE: The Series 2011 bonds will be issued in a fixed rate mode with
last maturity in FY 2041.
MARKET/COMPETITIVE POSITION: HEALTHY DEMAND WITH STABLE MARKET POSITION AND
GROWING NET TUITION PER STUDENT
Moody's expects the College's market position will remain solid based on the
College's niche as a leading provider of contemporary music education. The fall
2010 matriculation rate (ratio of number of students enrolled to number of
students accepted) is at a high 47.2% reflecting the robust student demand for
its programs. The College is highly selective (ratio of student applications
received to student applications accepted for admission) which is reflected in
the 34.8% rate for fall 2010. The net tuition per student, at $28,311 in FY
2010, has experienced good growth over the last five years with a compounded
average annual rate of 5.6%. Management reports that in spite of this healthy
growth in the tuition, the tuition is still at the lower end of the spectrum as
compared to its competitors. The College has experienced modest enrollment
growth over the last 5 years with the average annual growth of 2.5% during
FY2006 to FY 2010. Preliminary fall 2011 student data suggests that the
number of applications and the matriculation rate is in line with that in
Berkleemusic, an online Extension School of the College, offers online programs
and has experienced revenue growth in this business line since its inception in
FY 2002. The College's management reports that over 17,500 individuals have
taken a course online since FY 2002. Berklee also offers summer programs to
provide full time prospective students an opportunity to determine whether
Berklee is the right fit for them. Over 1,500 student enroll in this
program every year.
Management reports opening summer classes at its Valencia, Spain campus from
2011 with a batch size of 58 students. The College has significantly scaled back
the financial investment necessary for this campus by, among other actions,
entering into a new lease arrangement, which reduces initial annual lease
commitments to approximately 100,000 euros from the 1,000,000 euros
contemplated in the original arrangement. By leasing smaller, existing (rather
than new) space, the College is able to open in 2012, about one year earlier
than expected. The College will absorb about $1 million of expenses in FY2012
associated with the Valencia campus. With the projected increase in enrollments,
this amount is expected to reduce gradually.
The College competes with stand-alone specialty schools as well those within a
university system. Primary competitors include Ithaca College(rated A2), the
Boston Conservatory, the New School for Jazz and Contemporary Music, New England
Conservatory (rated Baa1), Boston University(rated A2), NYU School of Music
(NYU rated Aa3), and Oberlin College (rated Aa2).
OPERATING PERFORMANCE: CONSISTENTLY POSITIVE OPERATING MARGINS AND CASH FLOW
PROVIDE GOOD DEBT SERVICE COVERAGE
Moody's expects that cash flow and debt service coverage will remain
strong, incorporating the Series 2011 bonds with the bond-financed
project (student housing). The College's track record of positive
operating performance, healthy debt service coverage, and strong management and
governance are key credit strengths helping to anchor the rating within the A2
category. FY 2010 operating surplus, by Moody's calculations, was the tenth
consecutive year of favorable performance. College achieved a 13.1% three-year
average operating cash flow margin (during FY 2008-2010) and 1.94 times
average debt service coverage over the same period. Management projects that FY
2011 operating surplus will be stronger than FY 2010.
The College has a concentrated revenue base with 88.3% of the revenue deriving
from the student charges. However, there is some revenue diversification within
student revenue charges. The management reports that Berklee online program and
the summer programs generated about 9.3% and 5.8% respectively of the total net
tuition revenue in FY 2011.
The College's governance and management is viewed as a credit strength. The
board of trustees represents a good mix of long term and new members with
diverse backgrounds. The current president is the first president who is not a
family member of the Berk family. Under the current management, the College
established semester-abroad programs in Greece and Germany, expanded the Boston
campus facilities through real estate acquisitions, started a campus in city of
Valencia, Spain that will offer graduate programs in a variety of music and
music technology areas beginning in 2012. The College adopted a more selective
admission policy requiring a mandatory audition and interview process from fall
2006 onwards. The College also initiated an African studies program, the Berklee
Global Jazz Institute, and an American Roots Music program.
BALANCE SHEET POSITION: NET ASSETS DEPRESSED BY PENSION LIABILITY; SERIES 2011
RESULTS IN INCREASINGLY LEVERAGED BALANCE SHEET
The College's financial resource base is thin relative to its debt and operating
expenses. Expendable financial resources of $102.6 million cushion proforma debt
by 0.37 times and operations by 0.65 times. These ratios are weak for the rating
category, although we recognize that the College's net assets are depressed by a
$35 million pension liability and that cash and investment balances are
materially stronger than net assets ($222 million of cash and investments in FY
2010 compared to $121.3 million of total financial resources)., With the strong
management team in place, a trend of consistently positive cash flows, and
robust market position, Moody's believes that the College will be able to manage
The debt service on the Series 2011 bonds has been scheduled to increase around
the time the student housing project starts generating positive cash flows, with
principal payments scheduled to begin on the Series 2011 in 2012. The existing
debt service payments average around $11 million and with the inclusion of new
debt, the debt service payments will increase to approximately $17 million
per annum resulting in a proforma debt service coverage of 1.3 times based on FY
2010 operating cash flow.
The College is closing its defined benefit pension program to new
members starting January 2012. For new members, the College is planning to
introduce a defined contribution retirement plan starting January 2012. The
management reports that the pension liability was $37.1 million as of May 31,
For fiscal 2011, the College reported an investment return of positive 20% (FYE
May 31) compared to a positive return of 16% in fiscal 2010. The endowment
portfolio is well diversified; at 5/31/2011, the composition was: U.S equity
- 25.6%; non-US equities - 19.4%; private equity - 19.3%; fixed income - 7.7%;
Flexible capital - 23.1%; Real assets - 4.9%.
Liquidity is healthy, with unrestricted monthly liquidity of $105.2 million and
256 monthly days cash on hand. The College recently completed a comprehensive
fundraising capital campaign raising $54.5 million against a goal of $50
The stable outlook reflects our expectations of continued favorable
operating performance and cash flows, with continued strong market
positions. The stable outlook heavily incorporates our expectations of careful
management of the large construction project and an assumption of no additional
debt in the next two years.
WHAT COULD MAKE THE RATING GO UP
Unlikely in the intermediate term given the heavily leveraged balance sheet at
this rating level. In the long term, maintenance of continued strong operating
performance and cash flows by growth in the net tuition revenue and careful
expense containment, healthy philanthropic support, significant growth in
financial resources, broader revenue diversification.
WHAT COULD MAKE THE RATING GO DOWN
Additional borrowing without commensurate growth of financial
resources, sustained and broad deterioration in
market position, inadequate annual debt service coverage.
KEY INDICATORS (Fall 2010 enrollment data and FY 2010 audited financial data):
Total Enrollment: 4,030 full-time equivalent Students
Total Debt: $189.3 million
Total Proforma Debt: $279.3 million
Proforma Comprehensive Debt (including pension liability and operating leases):
Total Financial Resources: $121.3 million
Total Cash and Investments: $222.1 million
Total Cash and Investments to Pro forma Direct Debt: 0.80
Expendable financial resources to Proforma debt: 0.37
Expendable financial resource to operations: 0.65
Monthly liquidity: $105.3 million
Monthly days cash on hand: 256 days
Operating Cash Flow Margin: 13.5%
Three-Year Average Debt Service Coverage: 1.94 times
Average Maximum Annual Debt Service Coverage: 1.8
Reliance on Student Charges (as a % of operating revenue): 88.3%
Series 2007A: A2
Series 2011: A2
College: Amelia Koch, Vice President for Finance, 617-747-3188; Richard Hisey
Chief Financial Officer, 617-747-8089
Underwriter: John Malpiede, Citigroup, 617-346-9252
Financial Advisor: Chris Doyle, Public Financial Management, 617-330-6914
PRINCIPAL METHODOLOGY USED
The principal methodology used in this rating was Moody's Rating Approach for
Private Colleges and Universities published in September, 2002. Please see the
Credit Policy page on www.moodys.com for a copy of this methodology.
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Public Finance Group
Moody's Investors Service
Kimberly S. Tuby
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S ASSIGNS A2 RATING TO BERKLEE COLLEGE OF MUSIC'S (MA) $90 MILLION SERIES 2011 BONDS AND AFFIRMS A2 RATING ON OUTSTANDING DEBT; OUTLOOK IS STABLE
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