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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

19 Jan 2011

COLLEGE HAS $86.8 MILLION RATED DEBT OUTSTANDING, INCLUDING CURRENT ISSUANCE

Boyle (County of) KY
Higher Education
KY

Moody's Rating

ISSUE

RATING

College Refunding Revenue Bonds, Series 2011A

A3

  Sale Amount

$22,090,000

  Expected Sale Date

02/15/11

  Rating Description

Private University Revenue

 

College Refunding Revenue Bonds, Taxable Series 2011B

A3

  Sale Amount

$8,340,000

  Expected Sale Date

02/15/11

  Rating Description

Private University Revenue

 

 
Moody's Outlook   Negative
 

Opinion

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 never issued.

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.

STRENGTHS

*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.

CHALLENGES

*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 target demographic.

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.

Outlook

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%

RATED DEBT

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)

CONTACTS

Centre College: John Cuny, Vice President for Finance and Treasurer, 859-238-5458

Underwriter: William C. Elliott, Managing Director, PNC Capital Markets, (614) 529-2177

METHODOLOGY

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, 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.

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

Stephanie Woeppel
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


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

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
No Related Data.
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