DOWNGRADE IMPACTS $260 MILLION OF RATED DEBT, INCLUDING THE CURRENT OFFERING; UNIVERSITY HAS A TOTAL OF $437 MILLION OF PRO FORMA RATED DEBT
Pennsylvania Higher Educational Facs. Auth.
Drexel University Revenue Bonds, Series 2011A
Expected Sale Date
Private University Revenue
NEW YORK, Apr 21, 2011 -- Moody's Investors Service has downgraded Drexel University's (Drexel) revenue
bond rating to A3 from A2 and has assigned an A3 rating to Drexel University's
Series 2011A bonds to be issued through the Pennsylvania Higher Educational
Facilities Authority. For more information on rated debt see RATED DEBT section
below. The rating outlook is stable.
SUMMARY RATING RATIONALE
The downgrade and the A3 rating reflect the University's escalating
balance sheet and operating leverage and tepid financial resource growth in
recent years coupled with a 22% increase in pro forma debt to $476 million from
fiscal year end 2010. We believe Drexel's sound student market position with
growing enrollment and notable revenue growth with solid net tuition per student
of $21,637 in fiscal 2010 will continue. While operating performance has been
sufficient, many rated large urban universities have considerably stronger cash
flow in support of operations.
*Relatively leveraged balance sheet with expendable financial resources of $225
million cushioning pro forma direct debt a thin 0.5 times, as compared to
Moody's FY 2009 median of 0.8 times for large, A-rated private universities.
With pro forma debt to operating revenue of 62%, Drexel's operating leverage is
increasing as well, from 51% at the end of fiscal 2010.
*Debt structure adds risk with 26% of pro forma debt in variable rate mode,
which includes $123 million letter of credit exposure with numerous optional
bank termination events and covenants as well as another $121 million exposed to
financial covenants with National Public Finance Guaranty. Monthly liquidity of
$163 million covers pro forma bank debt by 131% and counterparty diversity
slightly mitigates the risk.
*Strong competition for students in mid-Atlantic region, including institutions
with larger endowments and fundraising support, reflected in yield data on
admitted freshmen applicants which came in at 10.4% in fall of 2010,
significantly weaker than 21.7% in 2006.
*Patient care exposure in competitive Philadelphia market with 12.0% of
operating revenues from patient activities in FY 2010.
*Established market position in the mid-Atlantic higher education marketplace
for an urban, comprehensive university with full-time equivalent enrollment
(FTE) of 19,655 students and niche program in cooperative education; solid
growth in net tuition per student which was $21,637 in FY 2010, up 6% from
the prior year with management reporting additional growth in FY 2011.
*Notable momentum and growing revenue base with Moody's adjusted
operating revenue of $757 million in fiscal 2010, up 27% from fiscal 2006. In
addition to traditional educational programs, revenue growth has been aided by
online programs which totaled $54 million in FY 2010.
*Continued fundraising success with $38 million in average gift revenue per year
in fiscal years 2008 through 2010. The University announced a $45 million gift,
its largest ever, in the current year for the LeBow College of Business.
*Substantial financial resource base with FYE 2010 total financial resources of
*Growing base of research activity with research expenditures of $95 million in
FY 2010, which is growing and constitutes 9% of revenue.
DETAILED CREDIT DISCUSSION
USE OF PROCEEDS: Proceeds will provide funds for several capital projects,
refinancing of the prior fixed rate (Series 1997, 1998 and 1998-2 bonds) and
variable rate (Series 2002-2, 2002-B and 2003-B) bonds and to pay costs of
issuance. Major capital projects total approximately $103 million and
include the LeBow College of Business, the Papadakis Integrated
Sciences Building and a new home for the Westphal College of Media Arts and
LEGAL SECURITY: The loan agreement is a general obligation of the University
secured by Unrestricted Gross Revenues.
INTEREST RATE DERIVATIVES: The University has entered into two variable-to-fixed rate swap agreements associated with its Series 2005B bonds(counterparty is Wells Fargo, formerly Wachovia Bank, rated Aa2 andterminates on May 1, 2030) and a $15 million bank note (counterparty is TD Bank rated Aa2 and terminates on January 2, 2014). The notional amount on the Wells Fargo swap was $29.8 million at with a market valuation of a $2.6 million liability to the University as of March 31, 2011. The notional amount of the TD
Bank swap was $18.9 million at FYE 2010 with a market valuation of $420,624
liability to the University on the same date. The Wachovia agreement collateral
posting threshold for Drexel is sensitive to the move to A3 from A2, with the
threshold moving from $10 million to zero. Management reports that Wells Fargo
may not require the collateral posting, but in either case we believe the
liquidity (monthly liquidity of $163 million at fiscal year end 2010) provides a
substantial cushion relative to the derivative exposure.
MARKET POSITION/COMPETITIVE STRATEGY: SOLID MARKET REPUTATION FOR URBAN
Moody's believes that Drexel's niche as a well-known urban university with a
strong reputation in engineering and information technology and long-standing
commitment to cooperative ("co-op") education will continue to
underpin a solid credit quality for the foreseeable future, although the
University may experience increasing price sensitivity in the coming years.
Drexel's co-op program is unique in Pennsylvania, and one of only three in the
United States. Under the five-year program, undergraduates alternate periods of
on-campus study with full-time employment in fields related to their academic
interests. More than 1,200 employers in business, government, and education
participate in the program.
Founded in 1891 by Philadelphia financier and philanthropist Anthony Drexel, the
University enrolled 19,655 full-time equivalent (FTE) students in the fall of
2010, up remarkably from just under 11,000 FTE students in 2001. Roughly 65% of
its students are undergraduates. Selectivity for undergraduates (full-time
freshmen) came in at 55.1% in the fall of 2010 with yield on admitted
students of a low 10.4% (down from 21.7% in fall 2006) indicating fierce
competition for students in the mid-Atlantic region. Net tuition per student has
been increasing, to $21,637 in FY 2010, up 6.3% from the prior year.
Management reports another strong year of net tuition revenue growth in FY
2011, up 9.6% aided by a mix of enrollment growth (around 3.3%) and net tuition
Key competitors include other regional and national technology-oriented private
institutions, such as Rensselaer Polytechnic Institute (rated A3), Lafayette
College (Aa3), and Lehigh University (Aa2) as well a number of public
institutions including the nearby Temple University (Aa3). We believe Drexel
benefits from its location in the University City neighborhood of Philadelphia
that has become an increasingly desirable location for traditional college age
students over the last two decades.
Graduate enrollment totaled 6,900 FTE students in the fall of 2010 and has been
a significant source of enrollment growth. In addition to the acquisition of a
College of Medicine (with over 1,100 students), the University has grown
graduate enrollment with the addition of a law school (expecting full
accreditation in the spring of 2011) along with a number of other new programs.
For both undergraduate and graduate programs Drexel has also developed a number
of e-learning initiatives that have aided enrollment growth.
With grants and contracts comprising 15% of its Moody's calculated operating
revenue base, the University has a sizeable research enterprise with $66 million
of research awards in FY 2010. Federal agencies make up 84% of that total with
substantial exposure to the National Institute of Health.
OPERATING PERFORMANCE: SOLID OPERATING PERFORMANCE ALTHOUGH CASH FLOW IN SUPPORT
OF DEBT SERVICE IS NOT AS STRONG AS MANY LARGE URBAN UNIVERSITIES
Moody's expects Drexel and its subsidiaries will continue generating
positive operating results in the near future, in line with recent trends. The
three-year average operating margin of 2.9% includes the patient care enterprise
of its College of Medicine. While the FY 2010 operating cash flow margin of 7.9%
is sound, we note that Moody's large A-rated universities typically have much
stronger cash flow performance with a FY 2009 median of 13.6%. Average debt
service coverage is likewise adequate at 2.3 times as compared to the large
A-rated median of 3.0 times. Given the 22% increase in debt, the University will
need to increase cash flow to support debt service with pro forma maximum
annual debt service now equating to 4.6% of FY 2010 operating expenses.
Drexel has limited revenue diversity with investment income and gifts comprising
just 6% of FY 2010 $757 million operating revenue base. Tuition and auxiliaries
account for the lion's share of operating revenues (64%), followed by research
grants and contracts (15%), patient care revenue of its physician practice
group (12%), gifts (2%), and investment income (4%). Although the University has
no formal relationship with the Commonwealth of Pennsylvania (general obligation
rating of Aa1), it has received annual support from the state since 1959 for
instruction and financial aid. The level of support for Drexel is $3 million in
FY 2011, down from approximately $18 million in FY 2006.
The Philadelphia Health & Education Corporation (PHEC), operating under the
name Drexel University College of Medicine, is a 501(c)(3) affiliate of the
University and consolidated in the University's financial statements. PHEC is
not obligated on the University's debt. Drexel's faculty practice plan, Drexel
University Physicians, is an internal division of the College of Medicine.
Drexel University College of Medicine (PHEC) has a majority of its operational
ties to Tenet Healthcare Corporation, which Moody's rates B2. In return of the
College providing supervisory & teaching, program and directorship services
to Tenet, PHEC is compensated by Tenet under the terms of an Amended and
Restated Academic Affiliation Agreement and other relationships. In FY 2010, the
College received $18 million for services provided to Tenet. PHEC has actively
sought to increase the diversity of training sites for its medical students
and has become less reliant on Tenet over the recent years. Approximately 65% of
third and fourth-year medical student training occurs outside of Tenet
hospitals, while all residency physicians are employed by Tenet.
BALANCE SHEET POSITION: LEVERAGE INCREASING FASTER THAN FINANCIAL RESOURCES
AFTER 2009 LOSS; LIQUIDITY RELATIVE TO DEMAND DEBT IMPROVES THROUGH PLAN OF
Moody's anticipates that Drexel will continue to enjoy a relatively healthy pool
of financial assets even as leverage increases. At the end of FY 2010, the
University had total financial resources of $445 million. Expendable financial
resources for fiscal 2010 was $225 million, down from $391 million as of June
30, 2008 from investment losses and the use of cash flow for capital
investment. Expendable financial resources cushion pro forma direct debt
0.5 times, below Moody's median of 0.8 times for large A-rated private
universities. In addition, Drexel has a material level of non-cancelable
operating lease commitments which add $69 million to Moody's calculation of
comprehensive debt. The lease agreements are primarily related to the College of
Medicine. Expendable financial resources cushion pro forma comprehensive debt
Drexel plans to continue the recent pattern of relatively intense investment in
capital facilities aided by the proceeds of the Series 2011A bonds. Purchases of
property, plant and equipment totaled $372 million in fiscal years 2006 through
2010, with an average capital spending ratio three times depreciation expense.
The University has received funding from diverse sources, including restricted
gifts for the capital investments, although the use of reserves for the
capital investments has reduced financial resource levels. Future
borrowing plans are limited. The University is exploring a partnership
development on its campus with a mixed use development that would provide more
student housing. The estimated project size is $91 million.
The 2011A plan of finance includes $100 million of new money increasing pro
forma debt to $477 million from $390 million as of June 30, 2010. Management
believes that the expanded academic facilities will allow for enrollment growth
and produce marginal net revenue to aid in the increased debt service, with pro
forma maximum annual debt service comparing to 4.6% of fiscal 2010
MBIA (now National Public Finance Guarantee) has insured the bulk of
Drexel's fixed rate debt. The MBIA agreements and other bank agreements include
a three-pronged additional bonds test and ongoing expendable resources to debt
test. Through an amended agreement, the insurer will relax the expendable
resource to debt threshold from its prior 50% standard through June 30, 2013,
measured once a year. The threshold will be 35% for June 30, 2011 and 45% for
June 30, 2012. The related increase in leverage is a primary driver of our
downgrade action to A3 from A2. The rating will remain sensitive over time to
the progress relative to the financial plan to meet and exceed the revised and
The Series 2011 plan of finance also includes a reduction in demand debt that
totaled $143 million at FYE2010. Pro forma demand debt is $123 million. The
University will be retiring its Multi-Modal Revenue Bonds Series 2003-B backed
by an Allied Irish (rated Ba2/NP) letter of credit. The two party pay rating on
the Series 2003-B bonds is Aa3/VMIG 3 currently. The University also plans to
replace its $64 million of its Landesbank Baden-Wuerttemberg Bank (rated
Aa2/P-1) LOC debt with new agreements with JPMorgan Chase (rated Aa1/P-1). Other
LOC agreements are with TD Bank (rated Aa2/P-1) and Wells Fargo (rated Aa2/P-1).
The letter of credit agreements contain a number of events of default which
could lead to accelerated repayment. The TD Bank agreement includes an event of
default with a rating trigger below A2 that management is
currently renegotiating along with a planned extension for the agreement that
has a current stated expiration date of September 30, 2011. Relative to renewal
risk of the various agreements, we believe the University has a history of
viable market access and a healthy level of diversity in its banking
With the reduction of demand debt, Drexel's coverage of demand debt from monthly
liquidity improves from 114% to 131%. Monthly liquidity of $163 million as of
June 30, 2010 was 32% of total cash and investments and equated to 84 monthly
days cash on hand as compared to our FY 2009 A rated median of 241
days. Management's multi-year financial plan includes building operating cash
with growth assumptions not dependent on increases from investment returns.
The University's pooled endowment had a 12.4% total return for the twelve months
ending June 30, 2010 after a punishing 25.2% loss in fiscal 2009. At the end of
FY 2010 the allocation was 31% international equities, 29% domestic equities,
16% hedge funds, 13% fixed income and cash, and 3% in private capital and 8%
Total gift revenue has averaged $38 million over the last three years pointing
to substantial donor support well above Moody's median of $19 million for large
A-rated private universities. The University is in the silent phase of its next
comprehensive capital campaign and earlier this year announced a $45 million
gift for the LeBow College of Business, its largest single gift. We believe
donor support will continue to provide an important source of funds for the
capital needs of Drexel as well as building endowed funds relative to its
growing expense base.
The stable outlook is based on our expectations of healthy operating
performance combined with expectations of a market position that will support
the University's growth plans. Moody's outlook anticipates no
additional borrowing without offsetting growth in financial resources.
What Could Change the Rating UP
Significant growth in the University's financial resource base relative to debt,
combined with consistently healthy operating performance, increases in liquidity
and student market position strengthening
What Could Change the Rating DOWN
Significant additional borrowing without offsetting resource growth; move to
weakened operating deficits; reduction in liquidity relative to demand debt
KEY DATA AND RATIOS (Fall 2010 enrollment and fiscal year 2010 financial data):
FTE Enrollment: 19,655 students
Net tuition per student: $21,637
Total financial resources: $445 million
Total direct pro forma debt: $476 million
Total indirect debt: $69 million (based on present value of operating leases)
Expendable financial resources to pro forma direct debt: 0.5 times
Expendable financial resources to operations: 0.32 times
Average three-year operating margin: 2.9%
Monthly liquidity: $163 million
Monthly liquidity to pro forma demand debt: 131%
Monthly days cash on hand: 84 days
Convertible Series of 1993, Series A of 2002, Series A of 2003, Series A of
Series 1997, First Series of 1998, Second Series of 1998, Series A of 2005 and
Series A of 2007: A3; insured by MBIA now National Public Finance Guarantee
Series B of 2003: A3; Aa3/VMIG 3 (Allied Irish Bank LOC to be refinanced)
Second Series of 2000, Series B of 2002: A3; Aa1/VMIG 1 (Landesbank
Baden-Wuerttemberg LOC to be replaced)
Series B of 2007: Aa2/VMIG 1 (Wells Fargo LOC)
Series B of 2005: A3; Aa2/VMIG 1 (TD Bank LOC)
Drexel University: Eric J. Olson, Drexel University, 215-895-2803
Underwriters: Dean M. Flanagan, Jefferies & Company, Inc., 212-336-7031;
Julius Coursey, Wachovia Securities, 267-321-8012
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.
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.
Dennis M. Gephardt
Public Finance Group
Moody's Investors Service
Erin V. Ortiz
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S DOWNGRADES DREXEL UNIVERSITY'S (PA) REVENUE BONDS TO A3 FROM A2 AND ASSIGNS A3 RATING TO SERIES 2011A REVENUE BONDS; OUTLOOK IS STABLE
Moody's Investors Service
250 Greenwich Street
New York, NY 10007