COLLEGE HAS $86.1 MILLION RATED DEBT OUTSTANDING, INCLUDING CURRENT ISSUANCE
Boyle (County of) KY
College Refunding Revenue Bonds, Series 2010
Expected Sale Date
Private University Revenue
NEW YORK, Sep 9, 2010 -- Moody's Investors Service has assigned an A3 rating to Centre College's (KY)
$22.1 million of Series 2010 College Refunding Revenue Bonds issued by the
County of Boyle. The rating outlook has been revised to negative from stable
based on weakened balance sheet strength coupled with higher-than-average
dependence on endowment spending.
USE OF PROCEEDS: Proceeds will be used to refund a portion of the Series 2008A
variable rate bonds.
LEGAL SECURITY: Unsecured general obligation of the College.
INTEREST RATE DERIVATIVES: Centre has three current swaps with PNC (rated
A1/P-1, on watch for possible downgrade) for a notional amount of $21.4 million
and two current and one forward starting swap with UBS AG (rated Aa3/P-1) for a
notional amount of $23.9 million. Per the Schedule to the Master Agreement,
downgrade of Centre or the counterparty below investment grade would constitute
an additional termination event. The current mark-to-market value of the swaps
is approximately negative $5 million. The College is required to post collateral
at a threshold amount of $5 million. The College anticipates terminating the PNC
swaps with the current issuance.
*Good market niche as a small, private, liberal arts college in Kentucky serving
a high performing student body. The College exhibits a healthy regional draw and
healthy out-of-state enrollment at 41% -largely attracting students from
Tennessee and Ohio.
*Historically strong philanthropic support with average annual gift revenue of
$9.3 million or $7,536 per student compared to the A-rated FY2009 median of
$1,959 per student. The College generates just over 10% of Moody's adjusted
operating revenue from gifts.
*Strong liquidity position supporting demand debt and operations. The College
had, as of the close of the unaudited 2010 fiscal year, 1.7 times coverage of
demand debt and over 580 days cash on hand from unrestricted monthly liquidity.
*Weakened balance sheet strength coupled with high operational leverage results
in no additional debt capacity at the current rating level. Expendable
financials resources provide a weakened, but still adequate, 0.8 times coverage
of debt and 1.4 times coverage of operations (based on unaudited FY2010
financials). Operating leverage is high at over 1.9 times with debt service at
8% of expenses.
*Consistent operating deficits when held to a 5 percent endowment spending draw
and including depreciation as an operating expense, resulting in an average
operating margin of -7.2%. As the College spends from the endowment at a higher
rating than sector norms, Moody's remains concerned about the College's ability
to continue to grow financial resources while continuing to support growing debt
service and operating expenses.
*Heavy reliance on tuition revenue with limited pricing flexibility. The College
continues to rely on student charges for 70% of operating revenues. Pricing
flexibility is somewhat limited as the Centre works to remain affordable to the
MARKET POSITION COMPETITIVE STRATEGY: LIBERAL ARTS COLLEGE IN CENTRAL KENTUCKY
WITH GROWING ENROLLMENT AND LIMITED ADDITIONAL PRICING POWER
Moody's expects that Centre College will maintain a stable market niche in
coming years as a leading provider of residential liberal arts education in
Danville, Kentucky. The College serves a high performing student market with 60%
of incoming students in the top 10% of their graduating class. With
approximately 41%% of enrollment from out-of-state, the college enjoys a strong
regional reputation, primarily attracting students from Tennessee (8%), Ohio
(8%), and Massachusetts (4%). Centre guarantees that all students who meet
certain academic and social standards will be able to have an internship, study
abroad (85% participation), and graduate within four years. Centre will allow a
student to remain an additional year tuition-free, if he or she has not been
able to complete these objectives.
Management anticipates that enrollment will continue to grow in coming years to
between 1300 and1500 full-time equivalent students. The College has experienced
healthy growth of enrollment in recent years from 1,129 in the fall of 2005 to
an estimated 1,240 in the fall of 2010.
While the College's enrollment has increased, its selectivity and matriculation
rates have weakened, with selectivity weakening from 63.2% in fall 2005 to 73.7%
in fall 2010 and yield of accepted students fall from 25.2% to 21.6% over the
same period. Management attributes recent declines in the matriculation rate to
concerns about affordability. While the College offers discounting in line with
liberal arts peers at 37% in FY2010, the demographics in the state provide a
limited market for full or high percentage pay students. The College
currently enrolls approximately 10% of full pay students. With a
comprehensive sticker price of $40,750 in the fall of 2010 (up 32% since fall
2005) and a commitment by management to remain accessible to the local
demographic, the College will likely see challenged pricing power in coming
years as it continues to compete largely with lower priced public options.
OPERATING PERFORMANCE: MOODY'S CALCULATED OPERATING DEFICITS EXPECTED TO
CONTINUE DUE TO CENTRE'S HIGH TOTAL ENDOWMENT DRAW
Moody's continues to calculate significant annual operating deficits, for Centre
College due to the College's strategic use of endowment draws at a rate above
the sector norm. Moody's normalizes endowment spending at 5% of the prior
three-year average of cash and investments for all private schools in our
portfolio. The College budgets an annual dollar value of endowment spending as
opposed to the more common method of a percentage based on historical value.
Moody's views this particular aspect of Centre's operating model as its primary
credit weakness producing an average operating deficit (FY 2008 - FY 2010) of
-7.2%. Our concern (particularly in the current environment) is that if the
quasi fund does not consistently achieve a sufficient return to support the
endowment spend and, over time, the College may have to tap the corpus of the
fund to make rising annual debt payments and is very likely to fall behind other
institutions in the rate of endowment and financial resource growth. At the
same time, adequate operating cash flow has provided an adequate average 1.1
times coverage of annual debt service.
Tuition, fees and room and board, provide 69.2% of Centre's operating revenue.
Investment income (19.0%) and gifts (10.5%) account for the second and third
major contributing factors to operating revenue. The College's ability to
continue to attract students is essential to its financial performance.
BALANCE SHEET POSITION: DEBT CAPACITY EXHAUSTED AT CURRENT RATING LEVEL;
PHILANTHROPIC SUPPORT EXPECTED TO DRIVE BALANCE SHEET GROWTH OVER TIME
Moody's believes that the College has exhausted its debt capacity at the current
rating level due to high balance sheet and operating leverage. The deterioration
of the balance sheet due to investment losses of 23% contributed to elevated
leverage in FY 2009. However, returns were positive 13.3% (preliminary) in FY
2010. Moody's expects that Centre College will be challenged to regain balance
sheet strength in coming years as result of higher-than-average dependence on
endowment draw. As a result, coverage of debt and operations by expendable
financial resources fell to 0.8 and 1.4 times, respectively in FY2010, from
1.2 and 2.2 times coverage, respectively, in FY2008. Operating leverage is high
at over 1.9 times with debt service at 8% of expenses.
As of June 30,2010, Centre's endowment was invested as follows: 31% in domestic
equity, 15% in international equity, 17% in alternative equity 23% in private
equity, and 13% in fixed income with a total market value of $176 million. This
amount does not include $22.9 million of funds held in trust by others, but for
the benefit of the College. Unrestricted financial resources are $60.3 million
(as per preliminary FY2010 financials) and provide the College with a healthy
liquidity picture with monthly liquidity providing 1.7 times coverage of demand
debt and over 580 days cash on hand as of 6/30/2010 (unaudited). The College
retains an investment consultant (Fourth Street Performance Partners) who works
closely with the Board and the Vice President for Finance and Treasurer to
oversee the College's endowment.
The College continues to demonstrate strength in fundraising; which we expect
will drive future endowment growth. The College ended the last capital campaign
in 2008 with $170 million in cash and pledges; well above the goal of $120
million. While gift revenue declined in the 2010 fiscal year, percentage
alumni participation (at 56% as reported by the College) continues to be one of
the highest in the nation and annual gift revenue per student at over $7,500
continues to outpace A-rated peers with a median of $1,959. Moody's expects that
the next campaign, celebrating the College's bicentennial, will be successful as
they continue to rely on an active and supportive alumni base. Management notes
that endowment growth dominant focus of the campaign which is expected to go
public in 2014.
The current offering will be used to refund a portion ($21.4 million) of the
Series 2008 variable rate bonds . The Bonds will be issued in the fixed rate
mode with final amortization in 2040. The College has no additional debt plans
in the next few years.
The negative outlook reflects Moody's concern regarding weakened balance sheet
strength coupled with higher-than-average dependence on endowment draws. The
outlook also incorporates our expectation that the College continue to grow
student generated revenue and generate sufficient debt service coverage.
What could change the rating--UP
Unlikely in the near-term given the negative outlook. Over time, a significant
increase in balance sheet resources supporting debt and operations combined with
improved operating performance
What could change the rating--DOWN
Further deterioration of the balance sheet cushion due to operating deficits or
debt issuance, insufficient debt service coverage from annual operating
performance, or inability to grow student generated revenue
KEY DATA AND RATIOS (Fall 2009 Enrollment, FY 2009 Financial Information):
*preliminary FY2010 financials included in parenthesis
Total Enrollment: 1,216 full-time equivalent students (1,240 FTE)
Freshman Applicants Accepted: 69.2% (73.7%)
Freshman Accepted Students Enrolled: 23.4% (21.6%)
Expendable Resources to Pro-forma Debt: 0.61 times (0.77 times)
Expendable Resources to Operations: 1.10 times (1.40 times)
Monthly Liquidity to Pro-Forma Demand Debt: (1.66 times)
Monthly Days Cash on Hand: 424 days (588 days)
3-Year Average Operating Margin: 0.7% (-7.2%)
Actual Debt Service Coverage: 1.3 times (1.5 times)
Series 2007A and 2010: A3
Series 2008A & 2008B: A1/VMIG1 (based on a letter of credit provided by PNC
Centre College: John Cuny, Vice President for Finance and Treasurer,
Underwriter: William C. Elliott, Managing Director, PNC Capital Markets, (614)
The principal methodology used in rating Centre College of Kentucky was Private
Colleges and Universities rating methodology published in September 2002. Other
methodologies and factors that may have been considered in the process of rating
this issuer can also be found on Moody's website.
The last rating action with respect to Centre College was on April 25, 2008 when
the A3 rating and stable outlook was affirmed. The rating was subsequently
recalibrated to A3 with a positive outlook on May 7, 2010.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, parties not involved in the ratings, public
information, and confidential and proprietary Moody's Investors Service's
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of assigning 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.
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S ASSIGNS A3 RATING TO CENTRE COLLEGE'S (KY) $22.1 MILLION OF SERIES 2010 BONDS; OUTLOOK IS REVISED TO NEGATIVE FROM STABLE
Moody's Investors Service
250 Greenwich Street
New York, NY 10007