RATING ACTION IMPACTS $3.5 MILLION OF RATED DEBT
Monmouth (City of) IL
NEW YORK, Sep 16, 2011 -- Moody's Investors Service has downgraded its rating to Baa1 from A3 on Monmouth
College's ("Monmouth") outstanding Series 2000 bonds issued
through the City of Monmouth. Please refer to the RATED DEBT section of this
report for a complete listing of total rated debt outstanding. The outlook has
been revised to negative from stable.
SUMMARY RATING RATIONALE
The downgrade to the Baa1 rating reflects pressure on the College's
enrollment coupled with operating in a highly competitive market
environment, tightening of operating performance, increase in variable rate
debt with cross default provisions, and thin liquidity to cover demand debt. The
negative outlook reflects weakening in the market position evidenced by
enrollment declines and pressure on the College's operating performance.
*Small operating base and heavily reliant on student charges (tuition, fees, and
auxiliaries) which contributed 80% of total operating revenues in FY 2010,
necessitating the increased importance of meeting enrollment targets and growing
net tuition revenue.
*Highly competitive market environment, particularly among regional liberal arts
colleges and lower-priced public institutions, evidenced by an 52% elevated
discount rate in FY 2010 that is estimated to be 53% in FY 2011, coupled with a
second consecutive year of enrollment declines with the recent fall 2011 class.
*Variable rate exposure of 88% of total debt, including a $10 million bank
qualified loan and $14.9 million of its debt supported by letters of credit,
adds risk to the credit profile, as the College's balance sheet resources could
be weakened from certain types of draws on the letter of credit or events of
default. Based on FY 2011 draft financials, approximately 88% of the College's
debt is in variable rate mode.
*Limited liquidity based on Moody's calculation of monthly liquidity, in FY 2010
the College had $10.1 million in liquid unrestricted cash and investments (funds
available within 30 days), which covered 68% of its $14.9 million of demand
debt. However, the College held approximately $17.6 million of
accumulated unrealized gains in its temporarily restricted net assets,
which could be used with board authorization.
*Favorable operating performance generating a three-year operating margin of
6.2% from FY 2008-FY 2010 and healthy cash flow margin which averaged 24% over
that same time period, but operating performance has weakened in recent years.
*Growth in expendable financial resources to almost $47 million based on draft
FY 2011 financials, the College's peak over the last five years, with expendable
financial resources cushioning pro-forma debt at 1.7 times and operations at 1.5
*Low age of plant of 9.2 years in FY 2010, which compares favorably to Moody's
FY 2010 median for private colleges of 12.6% with no new borrowing plans.
DETAILED CREDIT DISCUSSION
LEGAL SECURITY: Unsecured general obligation of the College. There is no debt
service reserve fund requirement.
DEBT STRUCTURE: Approximately 88% of the College's pro-forma debt is in variable
rate mode, including a $10 million tax exempt bank qualified loan that the
College entered into with PNC Bank (rated A2 with a positive outlook) in August,
2011. Although it is a 30-year loan, maturing on August 2, 2041, it has a set a
bank purchase mode term through July 18, 2018 with the bonds bearing interest of
variable rate equal to the sum of 65% of one-month LIBOR plus 110 basis points.
At the end of the initial term, the College then must elect to convert the
bonds to a different mode (including fixed rate or variable rate in weekly
mode with a letter of credit) or receive a new interest rate term of at
least one year from the Bank. Under certain events of default, if the bonds are
in a weekly mode, the Bonds will be automatically accelerated causing all
principal and interest due payable immediately. If the bonds are not in weekly
mode, the Purchaser or Trustee may declare that all principal and interest due
is payable immediately.
The College also has two letters of credit with PNC Bank, N.A to secure the
payment of the Series 2002 and 2005 Bonds. The letter of credit currently
expires October 1, 2015, mitigating near-term bank renewal risk. The College has
the right to request an extension, provided that such right is exercised prior
to 120 days before October 1, 2015.
Under the terms of the reimbursement agreement, for the LOCs, the College is
required to pay interest related to a liquidity drawing on the first business
day of month following the related drawing until such liquidity advance and all
accrued interest is paid in full. Liquidity drawings outstanding 367 days after
the date of the drawing, but prior to the expiration date, convert to a term
loan. Each term loan is payable to the Bank in equal quarterly installments of
principal and interest commencing on the 367th day after the drawing date ending
on the expiration date. The entire principal and accrued interest owed on each
Term Loan is due in full on the earliest of the (i) expiration date, (ii)
redemption of the bonds, and (iii) replacement of the letter of credit.
This debt structure does carry additional risks to the College, as the letter of
credit bank could require the bank to accelerate payment of the bonds and
terminate the letter of credit thereby causing the letter of credit to expire 20
days after the Trustee's receipt of notice. The Bank also could declare all
obligations with PNC to be immediately due and payable, including the Series
2011 Loan. In the event of bankruptcy proceedings, debt becomes immediately due
and payable without notice.
Events of default include but are not limited to failure to maintain a Debt
Service Coverage ratio of not less than 1.25 to 1.00 tested for the six month
periods ending June 30 and December 31, failure to maintain Unrestricted and
Temporarily Restricted Cash and Investments to all Debt of at least 1.15 to 1.00
tested for the six month periods ending June 30 and December 31, a material
adverse change, occurrence of a default for any Indebtedness. As of December 31,
2010 and June 30, 2011, the College is in compliance with the covenanted ratios.
At December 31, 2010 and June 30, 2011, the College's had Debt Service
Coverage of 5.02 times and 9.34 times, respectively and Unrestricted and
Temporarily Restricted Cash and Investments to all Debt of 2.94 times and 3.30
INTEREST RATE DERIVATIVES: None.
MARKET POSITION/COMPETITIVE STRATEGY: The College operates in a highly
competitive market environment, particularly among regional liberal arts
colleges and lower-priced public institutions. This is demonstrated by a high
and increasing discount rate which rose to 53% in FY 2011 from 52% in FY 2010
with a low net tuition per student of $12,093 based on FY 2011 draft
financials. Additionally, the College has experienced two consecutive years of
enrollment declines with full-time equivalent (FTE) enrollment declining by 5%
in two years. For fall 2011, the College's FTE enrollment of 1,307 students is
its lowest enrollment since fall 2004.
Monmouth draws an unusually high proportion of students from within the state of
Illinois (95% in fall 2010), a state projecting continued declines of high
school graduates over the next decade and the College plans to remain regionally
focused. This concentrated focus within a state with challenging demographics
could continue to place pressure on enrollment levels. The College has, however,
partnered with one university in Scotland, which have increased its
international population and is adding new academic programs.
OPERATING PERFORMANCE: The College's operating performance has weakened from the
prior year in FY 2010 and projected for FY 2011, but maintains adequate margins.
Management fully budgets for depreciation and its endowment spend rate of 4.5%
is below the 5% norm for the sector. Based on preliminary FY 2011
financials, the College's operating margin was 3.7%. Cash flow remains strong,
at 20.6% based on draft FY 2011 results. The decline in operating performance
has been attributed to slimmer net tuition revenue growth and growing expense
For FY 2012, management has budgeted for breakeven, thinner than the prior two
years, and does not expect to meet its targeted net tuition revenue numbers, as
a result in coming below budget for fall 2011 enrollment. Moody's expects
continued pressure on operating performance due to pressures on enrollment and
high discount rate, particularly with costs of constructing and operating a
new building, when it is constructed, if expense actions are not taken.
In FY 2010, the College's primary revenue source was student fees at 81%,
followed by investment income (12%), gifts (6%), and grants and contracts (1%).
BALANCE SHEET POSITION: In FY 2011, based on unaudited financials, expendable
financial resources grew 44% to $46.9 million as a result of favorable
investment returns and fundraising and provides a comfortable cushion to
pro-forma debt at 1.65 times and operations at 1.51 times.
In August 2011, the College borrowed $10 million to aid financing of a new $40
million Science and Business Center. The College has approximately $15 million
in cash and pledges, as well as funds appropriated from the state, and is
planning to fundraise the remaining amount.
The negative outlook reflects continued weakening in the College's
market position, enrollment declines and pressure on the College's
WHAT COULD MAKE THE RATING GO UP
Reduced risk in the College's debt profile; stabilized or strengthened student
demand and continued growth in net tuition per student; increase in balance
sheet resources that significantly bolsters the coverage of debt and operations
WHAT COULD MAKE THE RATING GO DOWN
Accelerated payment of debt under the letter of credit that reduces
the College's financial resources; ongoing trend of decreasing enrollment or
inability to grow net tuition per student; significant and ongoing decline in
operating performance and debt service coverage; additional borrowing plans
without commensurate growth of financial resources
KEY INDICATORS FY 2010 financial data, fall 2010 enrollment data (Preliminary FY
2011 financial data, fall 2011 enrollment data)
Total Full-Time Equivalent (FTE) Enrollment: 1,344 students (1,307 students)
Total Pro-forma Direct Debt: $28.4 million (including recent borrowing)
Total Pro-forma Comprehensive Debt: $28.4 million (including recent borrowing)
Total Financial Resources: $72.1 million ($87.4 million)
Expendable Financial Resources: $32.4 million ($46.9 million)
Total Revenues: $31.5 million ($32.2 million)
Monthly Liquidity: $10.1 million ($10.6 million)
Monthly Days Cash on Hand (unrestricted funds available within 1 month divided
by operating expenses excluding depreciation, divided by 365 days): 148.1 days
Expendable Financial Resources to Pro-forma Direct Debt: 1.75 (1.65 times)
Expendable Financial Resources to Operations: 1.09 times (1.51 times)
Debt to Revenues: 0.59 (0.88 times)
Three-Year Average Operating Margin: 6.2% (5.3%)
Three-Year Average Debt Service Coverage: 4.79 times (4.61 times)
Operating Reliance on Student Charges (% of total operating revenues): 81% (80%)
Series 2000: Baa1
Series 2002 and 2005: VMIG1 based on Letter of Credit provided by PNC Bank, N.A.
(Expires October 1, 2015)
College: Don Gladfelter, Vice President of Business and Finance, 309-457-2124
PRINCIPAL METHODOLOGY USED
The principal methodology used in this rating was U.S. Not-for-Profit Private
and Public Higher Education published in August 2011. Please see the Credit
Policy page on www.moodys.com for a copy of this methodology.
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Public Finance Group
Moody's Investors Service
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MOODY'S DOWNGRADES MONMOUTH COLLEGE'S (IL) RATING TO Baa1 FROM A3; OUTLOOK REVISED TO NEGATIVE FROM STABLE
Moody's Investors Service, Inc.
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