COLLEGE HAS $86.8 MILLION RATED DEBT OUTSTANDING, INCLUDING CURRENT ISSUANCE
Boyle (County of) KY
College Refunding Revenue Bonds, Series 2011A
Expected Sale Date
Private University Revenue
College Refunding Revenue Bonds, Taxable Series 2011B
Expected Sale Date
Private University Revenue
NEW YORK, Jan 19, 2011 -- Moody's Investors Service has assigned A3 ratings to Centre College's (KY) $22.1
million of Tax-Exempt Series 2011A and $8.3 million of Taxable Series 2011B
College Revenue Refunding Bonds issued by the County of Boyle. The rating
outlook remains negative based on continued operating deficits and weak debt
service coverage, as calculated by Moody's, due to elevated endowment
spending. The Series 2011A issuance replaces the Series 2010 Bonds that were
RATING RATIONALE: Moody's A3 rating and negative outlook reflect Centre
College's relatively healthy trend of philanthropic support and stable student
market position despite declines in the number of high school graduates and
economic challenges in the region . We have also incorporated the College's
deficit operating performance and weak debt service coverage, as calculated by
Moody's, due to elevated endowment spending, as well as the College's relatively
leveraged position both from a balance sheet and operating perspective.
USE OF PROCEEDS: Proceeds will be used to refund a portion of the Series 2008A
and 2008B variable rate bonds and to pay the costs of issuance
LEGAL SECURITY: Unsecured general obligation of the College. There is an
associated debt service reserve fund.
INTEREST RATE DERIVATIVES: Centre has three current swaps with PNC (rated
A2/P-1)) for a notional amount of $21.4 million and two current and one forward
starting swap with UBS AG (rated Aa1/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 College is required to post collateral at a threshold amount of
$5 million. The College anticipates terminating the PNC swaps and two of the UBS
swaps with the current issuance. Pro-forma, the College anticipates that one UBS
swap will remain outstanding to hedge the remaining $13.0 million of outstanding
variable rate bonds. The current swap liability for the pro-forma UBS swap is
under $2 million as of January 1, 2011.
*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 during fiscal years 2008-2010 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 unrestricted gifts.
*Strong liquidity position supporting demand debt and operations. The College
had, as of the close of the 2010 fiscal year, 5.1 times coverage of pro-forma
demand debt and over 587 days cash on hand from unrestricted monthly liquidity.
*Consistent operating deficits when held to a five percent endowment spending
draw and including depreciation as an operating expense, resulting in an average
operating margin of negative 8.3%. As the College spends from the endowment at a
higher rate 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.
*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. Operating leverage is high with
debt to revenues at almost 2.0 times and maximum annual debt service (as
calculated by Moody's) at almost 15% of 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 1,300 and 1,500 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% (tuition and housing) 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 a critical
credit weakness producing an average operating deficit (FY 2008 - FY 2010) of
-8.3%. Our concern is that if the quasi fund does not consistently achieve a
sufficient return to support the endowment spend, over time, the College is very
likely to fall behind other institutions in the rate of endowment and
financial resource growth and have limited financial flexibility. While
operating cash flow has provided an adequate average 1.0 times coverage
of annual debt service, it remains insufficient to cover Moody's calculated MADS
at 0.6 times.
Tuition, fees and room and board, provide 71% of Centre's operating revenue.
Investment income (18%) and gifts (9%) 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. Net tuition per
student ($24,522 including housing) continues to grow at a modest pace, up less
than 1% in FY2010 over FY2009. Moody's expects that weakened tuition pricing
power (as discussed above) will challenge the College's revenue growth in coming
years and highlight the need for significant expenditure controls.
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. While returns were healthy in FY2010 with a positive13.3%
return, 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. Moody's expects that Centre College will be challenged
to regain balance sheet strength in coming years as result of
higher-than-average endowment draw. Operating leverage is high at over 2.0
times and maximum annual debt service (as calculated by Moody's) at almost
15% 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, for the
benefit of the College. Unrestricted liquid resources of $68.9 million at the
close of FY2010 provide the College with a healthy liquidity profile,
providing 5.1 times coverage of pro-forma demand debt and 587 days cash on hand.
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. The College plans to
launch another campaign in conjunction with its bicentennial. Management notes
that endowment growth dominant focus of the campaign which is expected to go
public in 2014.
After the issuance of the Series 2011A &B refunding bonds, the College will
have $13 of variable rate demand (VRDO) debt outstanding. The VRDO debt is
supported by a Letter of Credit (LOC) with PNC Bank N.A. (rated A2/P-1). Under
the LOC, the College covenants to maintain annual Debt Service Coverage of 1.1
times and Expendable Financial Resources to Long-term Debt (Liquidity Covenant)
of 0.60 times. Breach of these covenants or a Material Adverse Change in the
financial condition of the College would constitute an Event of Default and may
result in immediate repayment to the Bank. At the close of the 2010 fiscal year,
the College was in breach of the Debt Service Coverage covenant. The Bank has
granted a waiver for the breach and modified the covenant calculation, with the
stipulation that a debt service reserve fund be established. After the
modification, the Debt Service Coverage and Liquidity Covenant calculations,
for the close of the 2010 fiscal year, were 2.3 and 0.78 times, respectively.
The College expects that all covenants will be met at the close of the 2011
fiscal year. In the event of a draw under the Letter of Credit, the College must
repay funds by the earlier of 366 days or the expiration date of the LOC.
The LOC is set to expire on April 22, 2011, at which time, the University
expects to renew the agreement for a term of at least one year.
The current offering will be used to refund a portion of the Series 2008 A and B
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.
The negative outlook reflects Moody's concern regarding weakened balance sheet
strength coupled with higher-than-average endowment draws resulting in
consistently negative operating margins and modest debt service coverage. The
outlook also incorporates our expectation that the College will continue to grow
student generated revenue providing sufficient annual 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 student demand and 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 2010 Enrollment, FY 2010 Financial Information):
Total Enrollment: 1,241 full-time equivalent students
Freshman Applicants Accepted: 73.7%
Freshman Accepted Students Enrolled: 21.6%
Expendable Resources to Pro-forma Debt: 0.76 times
Expendable Resources to Operations: 1.40 times
Monthly Liquidity to Pro-Forma Demand Debt: 5.1 times
Monthly Days Cash on Hand: 587 days
3-Year Average Operating Margin: -8.3%
Average Annual Debt Service Coverage: 1.0 times
Reliance on student charges: 71.4%
Series 2007A, 2011A and 2011B: A3
Series 2008A & 2008B: A1/VMIG1 (based on a letter of credit provided by PNC
Bank, N.A., (expiration date 4/22/2011)
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 this rating was Moody's Rating Approach for
Private Colleges and Universities published in September 2002.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, parties not involved in the ratings, and public
information, 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 assigning a credit rating.
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MOODY'S ASSIGNS A3 RATINGS TO CENTRE COLLEGE'S (KY) $22.1 MILLION OF SERIES 2011A AND $8.3 MILLION OF SERIES 2011B BONDS; OUTLOOK REMAINS NEGATIVE
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