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Rating Update:

MOODY'S DOWNGRADES MONMOUTH COLLEGE'S (IL) RATING TO Baa1 FROM A3; OUTLOOK REVISED TO NEGATIVE FROM STABLE

16 Sep 2011

RATING ACTION IMPACTS $3.5 MILLION OF RATED DEBT

Monmouth (City of) IL
Higher Education
IL

Opinion

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.

CHALLENGES

*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.

STRENGTHS

*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 times.

*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 times, respectively.

INTEREST RATE DERIVATIVES: None.

RECENT DEVELOPMENTS/RESULTS

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 base.

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.

Outlook

The negative outlook reflects continued weakening in the College's market position, enrollment declines and pressure on the College's operating performance.

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%)

RATED DEBT

Series 2000: Baa1

Series 2002 and 2005: VMIG1 based on Letter of Credit provided by PNC Bank, N.A. (Expires October 1, 2015)

CONTACTS

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.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Erin V. Ortiz
Analyst
Public Finance Group
Moody's Investors Service

Eva Bogaty
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA

MOODY'S DOWNGRADES MONMOUTH COLLEGE'S (IL) RATING TO Baa1 FROM A3; OUTLOOK REVISED TO NEGATIVE FROM STABLE
No Related Data.
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