UNIVERSITY WILL HAVE $432.9 MILLION OF RATED DEBT OUTSTANDING, INCLUDING THE CURRENT ISSUE
New Jersey Educational Facilities Authority
Revenue Refunding Bonds, Series 2011
Expected Sale Date
Public University Revenue
NEW YORK, May 3, 2011 -- Moody's Investors Service has assigned the long-term A2 rating to Rowan
University's (NJ) $32.4 million of Revenue Refunding Bonds, Series 2011 issued
through the New Jersey Educational Facilities Authority. The rating outlook is
stable. At this time, Moody's has also affirmed the ratings on parity debt
obligations, as detailed in the Rated Debt section of this report.
SUMMARY RATING RATIONALE
The A2 rating reflects the University's market position with healthy
student demand, balanced operating performance that has been aided
through continued growth in net tuition revenue offset by a weak balance
sheet cushion for debt and operations, debt service consuming a large portion of
the budget, pressure on state funding, and challenges associated with opening
and operating a medical school.
*Healthy student demand and market position in Glassboro, New Jersey as
evidenced by fall 2010 full-time equivalent (FTE) enrollment of 9,710 students
and increasing student demand seen through a surge in fall 2010 applications to
approximately 8,700 while maintaining a solid yield on admitted students of 31%
and selectivity of 56%. Student demand continues to improve for fall 2011 as
evidenced by increases in applications.
*Positive operating performance, despite a challenging state funding
environment, with three-year average operating margin of 4.3%, as calculated by
Moody's, from fiscal year (FY) 2008-2010, providing 2.4 times average
debt service over the same time period.
*Healthy generation of operating cash flow margins of 26% and 14% in FY 2010 and
FY 2009, respectively.
*State support for new medical school as evidenced by the allocation and receipt
of $15.6 million in appropriations for debt service from FY 2009 and FY 2010.
*High balance sheet and operating leverage, with debt service consuming a large
(12.2% peak debt service to current operations) portion of the budget.
Offsetting the high debt service is the University's increased cash flow to
cover debt service, with FY 2010 annual debt service coverage of 2.4 times.
Maximum annual debt service (MADS) of $35.9 million will be reached in 2012 and
after that remains relatively flat and elevated through 2027 when it begins to
*Balance sheet provides a weak cushion for debt and operations, highlighting the
University's leveraged position. At the end of FY 2010, financial resources
totaled $243.7 million, of which $126.1 million was expendable.
Expendable resources cover pro-forma debt by 0.3 times and operations by 0.6
*Operational challenge of opening and operating a medical school that is a new
undertaking for the University and reliant on state support to provide critical
funding for the program and new facility, with funding subject to annual
approval and therefore vulnerable to reductions in a fiscally challenging year.
*Reductions in state funding with future State budget cycles expected to remain
difficult. The University is reliant on the State to pay debt service for the
new medical school building, subject to annual appropriation, which may face
pressure. Total debt service is estimated at approximately $35 million
annually. However, the University maintains tuition pricing flexibility
to offset decreases in state funding.
*Ability to absorb future borrowing without affecting credit quality will depend
upon the University's ongoing ability to generate operating cash flow to support
DETAILED CREDIT DISCUSSION
USE OF PROCEEDS: Proceeds from the Series 2011 bonds will be used to refund the
outstanding balance of the Series 2001C bonds and fund costs associated with
LEGAL SECURITY: The bonds constitute a general obligation of the University,
payable from any legally available funds. The bonds are on parity with other
outstanding debt obligations.
DEBT STRUCTURE: All of the University's debt is fixed rate.
INTEREST RATE DERIVATIVES: None.
MARKET POSITION: SOLID MARKET POSITION AS REGIONAL NEW JERSEY PUBLIC INSTITUTION
WITH INCREASING DEMAND
Moody's expects Rowan to maintain healthy student demand and a stable market
position as a regional public institution located in Glassboro, New Jersey with
fall 2010 FTE of 9,710 students. Rowan has shown some fluctuations in
selectivity in admissions, with a fall 2010 acceptance rate of 56% compared to
46% in 2006 and yield on accepted students of 31% has remained relatively
level. While strong competition will remain, Moody's believes that
the University will be able to maintain its market position due to the
strong demand of New Jersey high school graduates and its academic programs.
Rowan benefits from the still healthy demographics in the Aa2-rated State of New
Jersey, and as a result, enjoys a fair degree of tuition pricing flexibility
which should help to support rising debt service requirements. The University
looks to grow enrollment moderately through improved retention and improving the
quality of entering classes. Net tuition per student trend remains healthy,
growing 7% in FY 2010 to $9,710 over the previous year. Continued growth in net
tuition revenue will be necessary in order for Rowan to continue supporting its
high debt service requirements, which comprise 12.2% of operations.
In June 2009, the Governor of New Jersey signed a Reorganization Plan which
provided for the transfer of specific functions and resources used by Robert
Wood Johnson Medical School (RWJMS) of the University of Medicine and Dentistry
(UMDNJ; rated Baa1/Negative) to Rowan. The Plan authorized a phase out of the
Robert Wood Johnson Medical School as part of UMDNJ's larger system, and
approved the establishment of a medical school at Rowan University. The Plan
also authorized the reallocation of funds (subject to annual appropriations)
from UMDNJ to Rowan.
Rowan and Cooper Health System (Baa3/Stable) have entered into an agreement to
establish a new four-year school in Camden, New Jersey. The Cooper Medical
School of Rowan University is expecting its first class of 50 graduate students
in fall 2012, with the program planned to ultimately reach full enrollment of
400 students across each year. In accordance with the Reorganization Plan, the
University has received $15.6 million in appropriations from the State in FY
2010 for the Medical School Project. This amount represents FY 2009 and FY 2010
appropriations and will either be applied to fund the costs of construction of
the Medical School or be used for the payment of debt service on the Series
bonds. The University also expects to receive a grant from the New Jersey
Economic Development Authority in the amount of $9 million which will be used to
fund construction costs.
Additionally, the State has included in its FY 2011 budget $18.4 million for
project implementation support ($7.8 million) and operating support ($10.6
million). The Reorganization Plan calls for the University to continue receiving
this support on an annual basis. Upon completion of the phase out of UMDNJ
operations at RWJMS-Camden and thereafter, the Reorganization Plan directs $9.44
million annually to the University for faculty support, campus administration
and security expenses. While the University is confident these funds will be
received each year as the State is committed to the project, the funds are
subject to annual appropriation from the State Legislature. In addition to
funding provided under the Reorganization Plan, the Affiliation Agreement
between the University and Cooper Health System sets forth unrestricted
operating support from Cooper in FY 2011-2014 averaging $4.5 million per year.
While it is expected for the University to receive support from both the State
and Cooper, the sole responsibility for all operating and capital costs
associated with the Medical School rests with the University.
OPERATING PERFORMANCE: BALANCED OPERATING PERFORMANCE PROVIDES ADEQUATE DEBT
Rowan's average operating margin of 4.3% from FY 2008-2010, as calculated by
Moody's, provides average debt service coverage of 2.4 times over the same
period. Incorporated into and elevating operating revenues is the $15.6 million
of additional appropriations from the State for the Medical School Project.
While total operating revenues are elevated, the University has
experienced healthy growth in net tuition revenue. Moody's expects this
healthy cash flow to continue based on ongoing tuition increases.
Rowan has a moderately diverse revenue stream with 52% of operating revenues
generated from net tuition and fees. This amount has steadily increased as state
appropriations (32%) have decreased since over the years. Moody's expects that
the University will be able to continue to grow student tuition and fees from
good demand and increases in tuition and fees in order to support rising debt
service. Based on FY 2011 performance, we expect FY 2011 operating
performance to remain similar to FY 2010.
The University's primary operating challenge remains its high debt
service costs. While operating performance has been strong and expected to
remain favorable, much of the surpluses will be consumed by debt service. Annual
debt service represents an elevated 12.2% of FY 2010 operations, substantially
greater than comparably rated institutions. While Moody's recognizes the
strengths of the University's operations and level debt service payments as well
as the $7.8 million appropriation from the State to be used to fully fund debt
service on the Series 2010 bonds, the University's current debt service burden
continues to necessitate uncommonly strong cash flow from operations in order to
sustain coverage. Maximum annual debt service (MADS) is a high $35.9 million
which will be reached in 2012 and remains relatively flat and elevated through
2027 when it begins to decline. This underscores the critical need to grow net
tuition revenues and to carefully manage operating expenses to produce strong
operating performance and cash flow.
The State's ability to fund higher education also remains a credit
challenge. Rowan's FY 2010 operating budget appropriations from the State
decreased to $33.5 million from $40.6 million in FY 2006, or 17.5%. To bridge
the loss in funding, Rowan and its in-state sister institutions, will
continue to use combine strategies of reducing costs and enhancing
revenues, such as through tuition, to meet the challenges of reduced
state appropriations. A future concern will be the ability of the State to
continue to fund the pension and OPEB liabilities on behalf of the University,
as any shifting of state obligations to the University will strain operations
already highly leveraged debt service burden.
Moody's recently downgraded the State of New Jersey's general obligation rating
to Aa3 with a stable outlook from Aa2 with a negative outlook reflecting a
weakened financial position and the expectation that recovery will be unlikely
in the medium-term due to rapidly rising fixed costs, relatively slow economic
recovery, and a lack of specified plans to rebuild fund balances. The Aa3 rating
also incorporates the state's broad, diverse economy and high resident wealth
levels, as well as the governor's broad powers to reduce expenditures,
which were implemented most recently in the 2011 budget. For more information on
the State of New Jersey, please refer to Moody's report dated April 27, 2011.
BALANCE SHEET POSITION: EXPENDABLE RESERVES PROVIDE LIMITED DEBT AND OPERATING
While the University maintains a solid financial resource base of
$234.7 million, almost half is permanently restricted through a $100 million
gift designated as permanently restricted given by Henry Rowan in the early
1990's. At the end of FY 2010, expendable financial resources were $126 million,
covering pro-forma debt a thin 0.3 times and operations by 0.6 times. We note
that liquidity for the University is good, with $91.5 million of monthly
liquidity which translates into 173 monthly days cash. It is important for the
University to maintain liquidity to support the rating with the high balance
sheet and operating leverage.
The University's potential debt plans over the medium-term could entail
borrowing for additional student housing or renovations to academic facilities
in Camden. The plans have not yet materialized and the size and structure are
not yet known. At the current rating level, Moody's believes Rowan maintains
extremely limited capacity to absorb future borrowing without affecting its
credit quality. Any impact of additional borrowing will depend upon its ongoing
ability to generate strong operating cash flow and to moderately grow expendable
financial resources to improve the cushion of resources to debt.
The University's long-standing president, Dr. Donald J. Farish, will be stepping
down in June 2011 to assume the responsibilities of President of Roger Williams
University (Briston, RI). The Board has enlisted the assistance of an executive
search firm that will conduct a national search for the next president with
an anticipated start date beginning in July 2012. The Provost, Dr. Ali
Houshmand, has been named interim President.
The stable outlook reflects Moody's belief that while operating
performance remains consistent and the University maintains strong demand and
enrollment, escalating debt service payments and a history of substantial
borrowing coupled with a very challenging state funding environment place
pressure on the rating.
WHAT COULD CHANGE THE RATING UP
Ability to sustain strong operating performance to facilitate growth
in financial resources and liquidity; gradually reducing very high
leverage; limited borrowing plans
WHAT COULD CHANGE THE RATING DOWN
Additional borrowing plans without commensurate growth in financial
resources; pressure on market position and net tuition revenue;
significant declines in State support for operating or debt service payments
KEY INDICATORS (Fiscal year 2010 financial data, fall 2010 enrollment data):
Total Enrollment: 9,710 full-time equivalent students
Total Pro-Forma Rated Debt: $432.9 million (Moody's Rated)
Expendable Resources to Pro-Forma Debt: 0.3 times
Expendable Resources to Operations: 0.6 times
Average Operating Margin: 4.3%
Average Debt Service Coverage: 2.4 times
Monthly Liquidity: $ 91.5 million
Monthly Days Cash on Hand (unrestricted funds available within 1 month divided
by operating expenses excluding depreciation, divided by 365 days): 173 days
Percent of Revenues from State Appropriations: 32%
State General Obligation Rating: Aa3 with a Stable outlook
Series 2000B, Series 2001B, Series 2001C, Series 2002K, Series 2003I, Series
2007B: rated A2; insured by FGIC
Series 2004C, Series 2006G: rated A2; insured by MBIA
Series 2005D: rated A2; insured by Ambac
Series 2008B: rated A2; insured by Assured
Series 2010, Series 2011: rated A2
University: Richard Hale, Vice P President of Administration and Finance,
University: Joseph F. Scully, Associate Vice President of Administration and
NJEFA: Jennifer Soyka, Project Manager, 609-987-0880
PRINCIPAL METHODOLOGY USED
The principal methodology used in this rating was Methodology for Rating Public
Universities published in November 2006.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, public information, confidential and proprietary
Moody's Investors Service information, and
confidential and proprietary Moody's Analytics information.
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of assigning 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.
Public Finance Group
Moody's Investors Service
Erin V. Ortiz
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S ASSIGNS A2 RATING TO ROWAN UNIVERSITY'S (NJ) $32.5 MILLION OF REVENUE REFUNDING BONDS, SERIES 2011; OUTLOOK IS STABLE
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