AFFIRMS Baa2 RATING ON OUTSTANDING REVENUE BONDS WITH PRO FORMA RATED DEBT OF $162 MILLION
Volusia County Educational Facility Authority, FL
Educational Facilities Revenue and Refunding Bonds (Embry-Riddle Aeronautical University, Inc. Project), Series 2011
Expected Sale Date
Private Higher Education Revenue
NEW YORK, Jun 13, 2011 -- Moody's Investors Service has assigned a Baa2 rating to
Embry-Riddle Aeronautical University's Series 2011 Educational Facilities
Revenue and Refunding Bonds issued by the Volusia County Educational Facilities
Authority. The expected sale amount is up to $42.42 million depending on market
conditions for the refunding. The rating outlook is stable. We have also
affirmed our outstanding ratings on Embry-Riddle Aeronautical University
(ERAU)'s debt as detailed below under RATED DEBT.
SUMMARY RATING RATIONALE
The Baa2 rating reflects the University's a solid market position in
aviation and aerospace technology programs supporting student revenue
growth, robust annual operating margins and continued increases in financial
resources. It also reflects limited revenue and programmatic diversity and
ongoing plans to fund capital needs through operating surpluses and related
*Strong market niche as the largest provider of aviation and
aerospace technology-related education in the US. The University enrolled, in
the fall of 2010, just under 4,890 full-time equivalent students at its Daytona
Beach Florida campus, about 1,654 FTEs at the Prescott Arizona campus and 9,153
students at distance centers across the US, internationally and online.
*Consistently positive cash flow from operations with expectations to end the
2011 fiscal year with a robust operating surplus.
*Healthy unrestricted financial resource base largely the result of retained
annual operating surpluses.
*Conservative 100% fixed rate debt profile coupled with manageable level of
planned capital investments over the next several years and no plans for
*Limited although growing resource base relative to debt and operations.
*High degree of dependence on student charges which accounted for 89.5% of
operating revenue in fiscal year 2010 with limited capacity to increase tuition
rates. With concentrated program offerings, the student market position remains
vulnerable to changes in aerospace industries and military activity.
*Despite notable growth, fundraising potential remains significantly below Baa
rated peers. Average gift revenue per student was $302 in FY 2009 compared to
the 2009 median for private colleges and universities of $1,954.
DETAILED CREDIT DISCUSSION
USE OF PROCEEDS: The Series 2011 Revenue and Refunding Bonds will be used to
currently refund all or a portion of the prior Series 1999A and 1999B Bonds,
make a deposit to the debt service reserve fund and pay certain costs of
LEGAL SECURITY: Security interest in "Tuition Revenue Fund" and all of
the "Tuition Revenues," which include a broad basket of
student charges including tuition, auxiliary and flight training fees. An
amended Mortgage and Security Agreement provides additional security related to
the Series 2005 Bonds including certain real assets on the University's core
Daytona Beach campus. Cash funded debt Service Reserve Fund. Rate Maintenance
Covenant and Additional Bonds Tests.
INTEREST RATE DERIVATIVES: None. All of the debt of Embry-Riddle Aeronautical
University (ERAU) is fixed rate.
MARKET POSITION/COMPETITIVE STRATEGY: WELL DEVELOPED NICHE AS
AVIATION-ORIENTED UNIVERSITY WITH GROWING TUITION REVENUE
Moody's believes that Embry-Riddle's niche as the leading provider of aviation
and aerospace technology-related education is a key credit strength for the
institution. ERAU has a growing national reputation in engineering, representing
nearly one-third of ERAU's enrollment at its main Daytona Beach and its
Prescott, Arizona campuses. ERAU also offers an array of education programs at
more than 150 centers through its Worldwide teaching centers which in FY 2011
accounted for 36% of tuition revenue. Located in 37 states and 10 foreign
countries, the centers offer significant geographic diversity.
Still, Embry-Riddle faces potential downward pressures on enrollment and
revenues from the issues facing the airline industry. Although ERAU graduates
show successful placement, we expect demand from the airlines to fluctuate over
time. The financial problems of the industry ripple through ERAU not only with
reduced demand for graduates but also in such ways as decreases in gift
revenues. We believe the increase in student enrollment in engineering and other
programs diminishes ERAU's dependence upon the fortunes of the airline industry.
For Fall 2010, total full-time equivalent enrollment of 15,697 students is
distributed across the main Daytona Beach campus (with 4,890 full-time
equivalent students (FTEs)), Prescott campus (1,654 FTEs), and the Worldwide
Campus activities with global teaching centers and web-based education serving
over 9,153 FTEs. Prospective student interest as measured by number of
applications has been on an upswing, driven largely by the Daytona Beach campus
which has benefited from significant capital investment over the last
decade. Regarding student demand, management reports expectations of meeting its
enrollment goal for this fall with measures of student demand for the Daytona
Beach campus showing increases for the fall of 2011 and slight decreases for the
Prescott campus. In the fall of 2010, ERAU accepted 80.5% of its freshman
applicants and yielded 30.0% of admitted students.
The overall student demand for ERAU's core programs has enabled it to implement
steady tuition increases (2.3% for Fall 2010 to $29,248 for the academic year)
with minimal tuition discounting (15.0% in fiscal year 2010 by Moody's measure).
Net tuition per student has shown healthy growth over the last few years, rising
4.4% in FY 2010 to $14,466. Management guidance for FY 2011 shows healthy growth
in overall net tuition revenue, continuing the momentum.
OPERATING PERFORMANCE: THREE-YEAR AVERAGE MARGIN OF 5.9% POINTS TO POSITIVE
MOMENTUM; LIMITED DIVERSITY OF REVENUE STREAMS
Moody's calculation of ERAU's three-year average operating margin of 5.9% at the
end of fiscal year 2010 demonstrates management's ongoing commitment and ability
to generate healthy cash flow to support debt service, build reserves and
reinvestment in facilities. With a $281 million operating revenue base in FY
2010 (as calculated by Moody's), ERAU has demonstrated a period of sustained
enterprise growth, up 18% from 2006. Average debt service coverage in fiscal
year 2008 through 2010 of 3.8 times points to solid performance as well as a
manageable debt burden with pro forma debt to FY 2010 operating revenues of 59%.
ERAU's revenue base remains extremely tied to student revenue which
contributed over 89.5% of the operating revenues in fiscal year 2010. Other
sources were distributed among grants and contracts (4.0%), gifts (0.3%) and
investment income (2.5%). We expect that the heavy reliance on student charges
will continue but efforts to increase sponsored research and flexible reserves
should help to increase diversity over the longer term.
BALANCE SHEET POSITION: GROWTH IN RESERVES FUELED BY MANAGEMENT DISCIPLINE WITH
TOTAL CASH AND INVESTMENTS OF $177 MILLION AT THE END OF FY 2010
The ability and willingness of management to build reserves from operating cash
flow underpinned our upgrade of the University's rating to Baa2 from Baa3 in
August of 2010. Total financial resources of $133 million reached an all time
fiscal year end high at the close of 2010, with only 10% of the total being
permanently restricted. Monthly liquidity of $129 million as of June 30, 2010
provided a healthy 199 monthly days cash on hand. Expendable financial
resources show improved flexibility as well, almost doubling between FY 2006 and
FY 2010 to $119 million. FY 2010 expendable financial resources cushion pro
forma debt by 0.7 times.
While the University has identified additional capital needs they have no
borrowing plans. ERAU does have a multi-year capital improvement plan that does
forecast a net use of reserve in FY 2012 of approximately $19 million. The
plan's total major projects totals $94 million for 2011-2014 with much of the
investment focused on the primary Daytona Beach campus.
Any near term growth in financial resources will most likely come from ERAU's
operations, with some contribution from fundraising. We do not expect that
fundraising will be a significant driver of growth in ERAU's financial
resources. Gift revenue has averaged $4.7 million per year in fiscal years 2008
ERAU's pooled endowment totaled $80.3 million as of April 30, 2011. The pool had
a 12.9% return in fiscal year 2010. The asset allocation as developed by the
Investment Committee of the Board of Trustees as of April 30, 2011 was
diversified among domestic equity (45%), international equity (19%), and fixed
income (36%). With eleven managers, manager diversity is limited but not in an
uncommon way for a pool of this size.
The Stable outlook reflects Moody's expectation that the University
will continue to generate healthy market demand and produce strong annual
operating margins while maintaining adequate financial resources to cushion
debt and operations.
WHAT COULD MAKE THE RATING GO UP
Continued growth in financial resources, expansion of revenue
diversity; continued health in student market demand and strong operating
WHAT COULD MAKE THE RATING GO DOWN
Deterioration of strong operating performance and debt service
coverage; weakness in student market demand and tuition revenue; material
KEY INDICATORS (Fiscal year 2010 financial data, fall 2010 enrollment)
Total enrollment: 15,697 full-time equivalent students
Freshman selectivity: 80.5%
Freshman matriculation: 30.0%
Total pro-forma direct debt: $164 million
Indirect debt: $46 million
Pro-forma comprehensive debt: $211 million
Expendable financial resources to pro-forma direct debt: 0.73 times
Expendable financial resources to operations: 0.46 times
Monthly liquidity: $129 million
Monthly days cash on hand (unrestricted funds available within one month divided
by operating expenses excluding depreciation, divided by 365 days): 199 days
Expendable Financial Resources: $119 million
Three-year average operating margin: 5.9%
Three-year average debt service coverage: 3.9 times
Reliance on tuition and auxiliary revenue (% of operating revenue): 89.5%
Series 1999A&B (to be refunded), 2003, 2005, 2011: Baa2, (Series 2003 and
2005 insured by Radian)
Embry-Riddle Aeronautical University: Eric B. Weekes, Senior Executive Vice
President, Chief Financial Officer, 386-226-6499
Underwriter: Jon Eichelberger, Managing Director, Morgan Keegan, 407-644-3173
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, 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.
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Dennis M. Gephardt
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
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MOODY'S ASSIGNS Baa2 RATING TO EMBRY-RIDDLE AERONAUTICAL UNIVERSITY'S (FL) $42.4 MILLION OF SERIES 2011 REFUNDING BONDS; OUTLOOK IS STABLE
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