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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

13 Jun 2011

AFFIRMS Baa2 RATING ON OUTSTANDING REVENUE BONDS WITH PRO FORMA RATED DEBT OF $162 MILLION

Volusia County Educational Facility Authority, FL
Higher Education
FL

Moody's Rating

ISSUE

RATING

Educational Facilities Revenue and Refunding Bonds (Embry-Riddle Aeronautical University, Inc. Project), Series 2011

Baa2

  Sale Amount

$42,420,000

  Expected Sale Date

06/21/11

  Rating Description

Private Higher Education Revenue

 

 
Moody's Outlook   Stable
 

Opinion

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 reserves.

STRENGTHS

*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 additional debt.

CHALLENGES

*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 issuance.

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 through 2010.

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.

Outlook

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 margins

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 additional borrowing

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%

RATED DEBT

Series 1999A&B (to be refunded), 2003, 2005, 2011: Baa2, (Series 2003 and 2005 insured by Radian)

CONTACTS

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

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, 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.

Analysts

Dennis M. Gephardt
Analyst
Public Finance Group
Moody's Investors Service

Stephanie Woeppel
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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
No Related Data.
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