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MOODY'S ASSIGNS Baa2 RATING TO NOVA SOUTHEASTERN UNIVERSITY'S (FL) SERIES 2011 REVENUE BONDS AND AFFIRMS Baa2 RATING ON OUTSTANDING DEBT; OUTLOOK IS STABLE

19 Jan 2011

THE UNIVERSITY WILL HAVE $207.8 MILLION OF RATED DEBT INCLUDING SERIES 2011 BONDS

Florida Higher Educational Fac. Fin. Auth.
Higher Education
FL

Moody's Rating

ISSUE

RATING

Series 2011 Educational Facilities Revenue and Refunding Bonds

Baa2

  Sale Amount

$84,160,000

  Expected Sale Date

02/14/11

  Rating Description

Private University Revenue Bonds

 

 
Moody's Outlook   Stable
 

Opinion

NEW YORK, Jan 19, 2011 -- Moody's has assigned a Baa2 rating to Nova Southeastern University's (NSU) $84.16 million of Series 2011 Revenue bonds to be issued through the Higher Educational Facilities Financing Authority, FL. We have also affirmed our Baa2 underlying ratings on the University's previously issued fixed-rate debt, listed at the end of this report. The University's rating outlook is stable. Depending on the market conditions, NSU may also consider full or partial refunding of Series 2000A, Series 2002A, Series 2004C (variable rate) and Series 2000B (fixed rate) bonds.

RATINGS RATIONALE: The Baa2 rating reflects the University's consistently large and diversified enrollment base, positive operating performance and healthy market position with net tuition per student of $18,911. The rating also incorporates the University's relatively thin financial resources and high amount of variable rate debt relative to monthly liquidity.

LEGAL SECURITY: Loan payments are a general obligation of the University, secured by a pledge of and first lien on pledged revenues, which include tuition, fees, and dormitory revenues. Some of the University's existing debt is further secured by debt service reserve funds which totaled approximately $19 million in FY 2010. The University will have a debt service reserve fund for Series 2011 bonds.

USE OF PROCEEDS: $59.16 million from the Series 2011 bonds may refund the variable rate demand bonds outstanding Series 2000A, 2002A, and 2004C and fixed rate bonds Series 2000B and pay the issuance costs. The remaining $25 million will be used to purchase an already leased four-story, 75,000-square foot student educational center in Palm Beach Gardens. The building is on schedule for a summer 2011 opening and will be home to more than 1,400 students seeking degrees in fields of pharmacy, business, education, mental health counseling, and school psychology.

INTEREST RATE DERIVATIVES: None.

Detailed Credit Discussion:

STRENGTHS

*Large enrollment base of 23,334 full-time equivalent students (FTE) in fall 2010, a 33% increase over fall 2006 enrollment, with diversified degree and program offerings. The University operates at multiple leased sites including some in other states and international locations and offers a diverse array of undergraduate, graduate, and professional degrees, including schools of business, law, medicine, osteopathic medicine, dentistry, and pharmacy.

*Consistently favorable operating performance, driven by growth in net tuition revenues. The cash flow margin, at 11.8%, provided strong debt service coverage, with the three-year average debt service coverage of 3.4 times from FY 2008-FY 2010. Net tuition per student rose to $18,911 in FY 2010 from $17,795 in FY 2008, driven by tuition increases coupled with rising enrollment. We expect that NSU will continue to produce favorable operating performance and cash flow with its strong student demand.

*Significant capital investment in recent years with an average capital spending ratio of 4.3 between FY 2006 and 2010 resulting in relatively low age of plant at 7.4 years.

*Some improvement in gift receipts, demonstrated by an average three-year gift revenue of $10.8 million (11% higher than in FY 2008) as compared to Moody's FY 2009 median for Baa-rated institutions of $5 million. NSU hired a Vice President for Development in December 2009 and is in the early stages of a comprehensive fundraising campaign "Changing Lives and Changing the World" with a total goal of $100 million over seven years.

CHALLENGES

*The University has a high amount of demand debt, including a large $58.09 million bank loan with Regions Bank, compared to relatively thin levels of liquidity. Assuming the Series 2000A, 2002A, 2004C bonds are also refunded, the University will have a lower amount of variable-rate debt (16% of debt), with monthly liquidity in FY 2010 covering pro-forma demand debt 0.99 times.

*The University's unrestricted financial resource base remains relatively small at $7.7 million at the end of FY2010, although the unrestricted cash position is stronger with net assets depressed by various liabilities. Management reports that the unrestricted monthly liquidity was $117 million in FY 2010, down from $129 million in FY 2009, with monthly days cash at 83.5 days versus 92 days in FY 2009.

*Reliance on student charges, which comprise 83% of total operating revenue in FY 2010, combined with the competitive student market (28% matriculation rate) highlights vulnerability of operations to enrollment shortfalls. It also stresses the importance of continued successful recruitment and retention of students as well as the University's ability to continue to grow net tuition per student in a challenging economic environment.

MARKET POSITION/COMPETITIVE STRATEGY: LARGE DIVERSIFIED ENROLLMENT BASE; HEALTHY GROWTH OF NET TUITION PER STUDENT

Moody's believes that NSU is relatively well positioned to sustain its healthy student market position. The University maintains strong demand from a non-traditional student population and invests in increasing its traditional-age student body. NSU's diversified programmatic offerings and location in the Florida market are key credit strengths. In addition to its main campus located in Fort Lauderdale/Davie (Broward County), NSU serves over 8,000 students at other smaller Florida satellite centers, a site in Las Vegas, Nevada, as well as 149 "cluster sites" located in 23 U.S. states and eight countries. NSU is a pioneer in the field of distance learning and serves approximately 5,000 students through its online program offerings with more than 15,000 unduplicated courses offered in 25 degrees online. The University currently has active distance education programs in 16 countries; in Puerto Rico, and in 24 states including Florida.

OPERATING PERFORMANCE: CONSISTENTLY POSITIVE OPERATING MARGINS WITH HEAVY RELIANCE ON STUDENT CHARGES

It is expected that the University will continue to produce positive operating results in the coming years as experienced over the last few years largely driven by growth in net tuition revenue and careful containment of operating expenses and budget monitoring throughout the year. The University 's three year average operating margin (FY2008-FY2010) was 3.9%. Cash flow has also remained robust at 11.8% in FY 2010 providing average debt service coverage of over 3.4 times.

The University's ability to further diversify its revenue base would be a positive credit factor since student charges represent a high 83.3% of operating revenue in FY 2010. NSU's management is proactive in controlling the expenditures with expenses essentially flat between FY 2009 and 2010

BALANCE SHEET POSITION: THIN FINANCIAL RESOURCE BASE RELATIVE TO PRO-FORMA DEBT AND OPERATIONS, ALTHOUGH CONTINUED OPERATING SURPLUSES EXPECTED TO HELP GROW FINANCIAL RESOURCE CUSHION OVER TIME

NSU maintains a high amount of debt for its level of financial resources, although debt service to operations was a manageable 3.6% in FY 2010. Including the current bond issuance, the University has total pro-forma direct debt totaling $372.8 million. The University also has a large amount of operating leases, and pro-forma comprehensive debt increases to $449.6 million. Expendable resources of $65.6 million in FY 2010 cover pro-forma direct debt by 0.18 times and cover expenses 0.12 times.

For FY 2010, the University's endowment achieved a 12.5% positive investment return as compared to a negative 24.1% for FY 2009. The University utilizes Colonial Consulting, LLC as its primary investment consultant.

NSU is in the mid phase of a major capital campaign with a $100 million goal. Fundraising will be targeted to fund scholarships, academic program support, faculty support, and other capital initiatives which include an aquatic center, coral reef research facility, optometry clinic, arts/cultural center. Management reports that to-date $27 million of gifts and pledges have been received toward the campaign goal. The University's historic fundraising has been modest relative to the size of enrollment and alumni base. Increased philanthropic support and resulting balance sheet strengthening would be credit positives.

The University has $58 million as a bank loan from Regions Bank with the bonds issued through the Town of Davie. Although this debt is fixed-rate and amortizes over 20 years, NSU could be required to purchase the full amount of outstanding bonds on May 29, 2014, if the Bank decides to exercise this option. The Bank must notify NSU by March 15, 2014 of its decision to tender the bonds. These bonds are a general obligation of NSU, secured by Pledged Revenues including tuition, and are on parity with the University's rated bonds which were issued through the Broward County Educational Facilities Authority. In addition to the tender option described above, the Bank can accelerate the debt if an Event of Default within the Credit Agreement is breached.

Letters of credit supporting the University's Series 2008A , 2004C, 2000A (expected to be refunded), and 2002A (expected to be refunded) variable rate bonds contain a variety of events of default which if breached would allow the bank to accelerate the debt and require immediate repayment by NSU. These events of default include, but are not limited to: completion of audited financial statements within 150 days after fiscal year end, other financial reporting requirements, a final non-appealable order rendered against the University (not covered by insurance) in excess of $500,000 unsatisfied for more than 30 days, entering into certain financial contracts including interest rate swap agreements, and various financial covenants. These financial covenants include: 1) maintenance of a liquidity ratio of at least 0.3 times to be tested at 6/30 and 12/31 (0.47 times as of 6/30/10, and estimated to be 0.94 times by management as of 12/31/10); 2) maintenance of a Federal Ratio of Financial Stability of at least 1.9 times (2.36 as of 6/30/10); and 3) maintenance of at least 1.9 times debt service coverage (3.09 times as of 6/30/10 as reported by NSU). With the current refunding, the proportion of variable debt will decline thereby reducing, to some extent, the potential challenges associated with renewal of credit facilities and acceleration of repayment.

Outlook

Moody's stable outlook anticipates that NSU will maintain its healthy student market position, continue to generate cash flows that provide healthy debt service coverage, and will have manageable borrowing plans. We also expect that Nova Southeastern University will continue to grow its endowment through fundraising initiatives and retention of surpluses.

What Could Change the Rating - UP

Significant growth of liquid financial resource base to provide stronger support for debt and operations coupled with maintenance of strong operating cash flow and debt service coverage; growth in revenue diversity

What Could Change the Rating - DOWN

Additional borrowing without commensurate growth of financial resources; deterioration of student market position; breach of financial covenants contained within letter of credit reimbursement agreements or Regions Bank loan

KEY INDICATORS (fall 2010 enrollment data and FY 2010 audited financial data)

Full-time equivalent (FTE) enrollment: 23,334 students

Total financial resources: $83.08 million

Pro-forma Direct debt: $372.8 million

Expendable financial resources-to-pro forma direct debt: 0.18 times

Expendable financial resources-to-operations: 0.12 times

Three-year average operating margin: 3.9%

Three-year average debt service coverage: 3.4 times

Reliance on student charges (as a % of operating revenue): 83.3%

RATED DEBT

Series 2000B and 2002B: Baa2 rating, insured by Radian

Series 2004A: Baa2 rating, insured by Ambac

Series 2004B : Baa2

Series 2006: Baa2 rating, insured by Assured Guaranty

Series 2011: Baa2

CONTACTS

Nova Southeastern University: Jeffrey Lowe, Treasurer, 954-262-5293

Financial Advisor: Timothy J. Kiley, Public Financial Management, 407-648-2208

Underwriter: H. Jay Bellwoar, BofA Merrill Lynch, 215-446-7042

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, 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

Kimberly S. Tuby
Analyst
Public Finance Group
Moody's Investors Service

Pranav Sharma
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


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MOODY'S ASSIGNS Baa2 RATING TO NOVA SOUTHEASTERN UNIVERSITY'S (FL) SERIES 2011 REVENUE BONDS AND AFFIRMS Baa2 RATING ON OUTSTANDING DEBT; OUTLOOK IS STABLE
No Related Data.
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