UNIVERSITY WILL HAVE $461 MILLION OF RATED DEBT OUTSTANDING, INCLUDING THE CURRENT ISSUE
Camden County Improvement Authority, NJ
Lease Revenue Bonds, Series 2010A (Build America Bonds)
Expected Sale Date
Public University Revenue
Lease Revenue Bonds, Series 2010B
Expected Sale Date
Public University Revenue
NEW YORK, Nov 18, 2010 -- Moody's Investors Service has downgraded its rating on Rowan University's (NJ)
outstanding debt obligations to A2 from A1. The bonds affected by this downgrade
are detailed at the end of this report. In addition, Moody's has assigned the
rating of A2 to Rowan University's $110 million of Lease Revenue Bonds, Series
2010A to be issued at Build America Bonds and $20 million of Lease Revenue
Bonds, Series 2010B. Both series will be issued through the Camden County
Improvement Authority. The downgrade reflects very high balance sheet and
operating leverage levels with rapidly rising debt service costs from debt
that will be issued to fund the academic facility for a start-up medical school.
The University's outlook is stable at the lower rating level.
USE OF PROCEEDS: Proceeds from the Series 2010A and Series 2001B bonds will 1)
fund the cost of property acquisition in Camden, New Jersey 2) develop,
construct and furnish a 200,000 square foot facility to house a new medical
school facility and 3) fund costs associated with issuance. Please see recent
developments section for additional information on the Medical School project.
LEGAL SECURITY: The bonds are backed by the University under the Lease Agreement
and constitute a general obligation of the University, payable from any legally
available funds. The bonds are on parity with other outstanding debt obligations
of the University.
INTEREST RATE DERIVATIVES: None.
*High levels of balance sheet and operating leverage, with debt service
consuming a large (12.2% peak debt service to current operations) portion of the
budget. Offsetting the high debt service is the University's increased cash flow
to cover debt service, with FY 2010 annual debt service coverage of 2.1 times.
Maximum annual debt service (MADS) of $33.6 million will be reached in 2026 but
until then remains relatively flat and elevated through 2030.
*Balance sheet provides a weak cushion for debt and operations, highlighting the
University's leveraged position. At the end of fiscal year 2010, financial
resources totaled $243.7 million, of which $126.1 million was
expendable. Expendable resources cover pro-forma debt by 0.3 times
and operations by 0.6 times.
*Operational challenge of opening and operating a medical school that is a new
undertaking for the University and reliant of state support to provide critical
funding for the program and new facility, with funding subject to annual
approval and therefore vulnerable to reductions in a fiscally challenging year.
*Reductions in state funding with future State budget cycles expected to remain
difficult although the University maintains tuition pricing flexibility to
offset decreases in state funding, with further pressures in the event the State
chooses to not fund the debt service for the new medical school building as it
is subject to annual appropriation.
*Ability to absorb future borrowing without affecting credit quality will depend
upon the University's ongoing ability to generate operating cash flow to support
*Healthy student demand and market position in Glassboro, New Jersey as
evidenced by fall 2010 full-time equivalent (FTE) enrollment of 9,710,
selectivity of 56%, yield on admitted students of 31% and increasing student
demand seen through a surge in fall 2010 applications to approximately 8,700.
*Positive operating performance, despite current state funding environment, with
three-year average operating margin of 2.0%, as calculated by Moody's, from FY
2008-2010, providing 1.7 times average debt service over the same time period.
*Healthy generation of operating cash flow margins of 24% and 11% in FY 2010 and
FY 2009, respectively.
*State support for new medical school as evidenced by the allocation and receipt
of $15.6 million in appropriations for debt service from FY 2009 and FY 2010.
MARKET POSITION: SOLID MARKET POSITION AS REGIONAL NEW JERSEY PUBLIC INSTITUTION
WITH INCREASING DEMAND
Moody's expects Rowan to maintain a healthy student demand and a stable market
position as a regional public institution located in Glassboro, New Jersey with
fall 2010 FTE of 9,710. Rowan has shown some fluctuations in selectivity in
admissions, with a fall 2010 acceptance rate of 56% compared to 46% in 2006 and
yield on accepted students of 31% has remained relatively level. While
strong competition will remain, Moody's believes that the University will be
able to maintain its market position due to the strong demand of New Jersey high
school graduates and its academic programs.
Rowan benefits from the still healthy demographics in the Aa3-rated State of New
Jersey, and as a result, enjoys a fair degree of tuition pricing flexibility
which should help to support rising debt service requirements. The College looks
to grow enrollment moderately through improved retention and improving the
quality of entering classes. Net tuition per student trend remains healthy,
growing 7% in FY 2010 to $9,710 over the previous year. Continued growth in net
tuition revenue will be necessary in order for Rowan to continue supporting its
high debt service requirements, which comprise 12.2% of operations.
In June 2009, the Governor of New Jersey signed a Reorganization plan which
provided for the transfer of specific functions and resources used by Robert
Wood Johnson Medical School of the University of Medicine and Dentistry (UMDNJ)
to Rowan. The Plan authorized a phase out of the Robert Wood Johnson Medical
School as part of UMDNJ's larger system, and approved the establishment of a
medical school at Rowan University. The Plan also authorized the reallocation of
funds (subject to annual appropriations) from UMDNJ to Rowan.
Rowan and Cooper Health System (Baa3/Stable) have entered into an agreement to
establish a new four-year school in Camden, New Jersey. The Cooper Medical
School of Rowan University is expecting its first class of 50 graduate students
in fall 2012, with the program planned to ultimately reach full enrollment of
400 students across each year. In accordance with the Reorganization Plan, the
University has received $15.6 million in appropriations from the State in FY
2010 for the Medical School Project. This amount represents FY 2009 and FY 2010
appropriations and will either be applied to fund the costs of construction of
the Medical School or be used for the payment of debt service on the Series 2010
bonds. The University also expects to receive a grant from the New Jersey
Economic Development Authority in the amount of $9 million which will be used to
fund construction costs.
Additionally, the State has included in its fiscal year 2011 budget $18.4
million for project implementation support ($7.8 million) and operating support
($10.6 million). The Reorganization Plan calls for the University to continue
receiving this support on an annual basis. Upon completion of the phase out
of UMDNJ operations at RWJMS-Camden and thereafter, the Reorganization Plan
directs $9.44 annually to the University for faculty support, campus
administration and security expenses. While the University is confident these
funds will be received each year as the State is committed to the project, the
funds are subject to annual appropriation from the State Legislature. In
addition to funding provided under the Reorganization Plan, the
Affiliation Agreement between the University and Cooper sets forth unrestricted
operating fund support from Cooper in FY 2011-2014 averaging $4.5 million per
year. While it is expected for the University to receive support from both the
State and Cooper, the sole responsibility for all operating and capital costs
associated with the Medical School rests with the University.
OPERATING PERFORMANCE: BALANCED OPERATING PERFORMANCE PROVIDES ADEQUATE DEBT
Rowan's average operating margin of 2.0% from FY 2002-2010, as calculated by
Moody's, provides average debt service coverage of 1.7 times over the same
period. Moody's expects this healthy cash flow to continue based on ongoing
tuition revenue increases. Rowan has a moderately diverse revenue stream with
54% of operating revenues being generated from net tuition and fees. This
amount has steadily increased as state appropriations (33%) have decreased since
over the years. Moody's expects that the College will be able to continue to
grow student tuition and fees from good demand and increases in tuition and fees
in order to support rising debt service.
Moody's believes the University's primary operating challenge remains its debt
service costs. While operating performance has been strong and expected to
remain favorable, much of the surpluses will be consumed by debt service. Annual
debt service represents an elevated 12.2% of FY 2010 operations, substantially
greater than comparably rated institutions. While Moody's recognizes
the strengths of the University's operations and level debt service payments as
well as the $7.8 million appropriation from the State to be used to fully fund
debt service on the Series 2010 bonds, the University's current debt service
burden continues to necessitate uncommonly strong cash flow from operations in
order sustain coverage. This underscores the critical need to grow tuition
revenues and to carefully manage operating expenses to produce strong operating
performance and cash flow.
Moody's additional credit concern remains the State's ability to fund higher
education. Rowan's FY 2010 operating budget appropriations from the State
decreased to $33.5 million from $40.6 million in FY 2006. To bridge the loss in
funding, Rowan and its in-state sister institutions, will continue to
use combine strategies of reducing cost and enhancing revenues, such as through
tuition, to meet the challenges of reduced state appropriations. A future
concern will be the ability of the State to continue to fund the pension and
OPEB liabilities on behalf of the College, as any shifting of state obligations
to the College will strain operations already highly leveraged debt service
Moody's rates the State of New Jersey Aa2 with a negative outlook, based on its
large, diverse economy with wealth levels among the highest in the nation and
growing fiscal pressure the state will face over the intermediate term. For more
information on the State of New Jersey, please refer to Moody's report dated
October 22, 2010.
BALANCE SHEET POSITION: RESERVES PROVIDE LIMITED OPERATING CUSHION
At the end of FY 2010, financial resources totaled $234.7 million, of which $126
million was expendable, providing an adequate operating and debt cushion.
Expendable resources cover pro-forma debt a thin 0.3 time and operations by
0.6 times. The University received a $100 million endowment gift from Henry
Rowan in the early 1990's and the corpus of the gift was designated as
permanently restricted, and does not contribute to the expendable resource
cushion for debt. We note that liquidity for the College is good, with $91.5
million of monthly liquidity which translates into 173 monthly days cash. It is
important for the College to maintain liquidity to support the rating with the
high balance sheet and operating leverage.
The University maintains potential debt plans over the medium-term which could
entail borrowing for additional student housing or renovations to academic
facilities in Camden. The plans have not yet materialized and the size and
structure are not yet know. At the current rating level, Moody's believes Rowan
maintains extremely limited capacity to absorb future borrowing without
affecting its credit quality. Any impact of additional borrowing will depend
upon its ongoing ability to generate strong operating cash flow and to
moderately grow financial resources to improve the cushion of resources to debt.
The stable outlook reflects Moody's belief that while operating
performance remains consistent and the University maintains strong demand and
enrollment, escalating debt service payments and a history of substantial
borrowing coupled with a very challenging state funding environment place
pressure on the rating.
What could change the rating-UP
Ability to sustain strong operating performance and liquidity growth; gradually
reducing very high leverage; limited borrowing plans
What could change the rating-DOWN
Additional borrowing plans without commensurate growth in financial
resources; pressure on market position and net tuition revenue; declines
in State support
KEY INDICATORS (Fiscal year 2010 financial data, fall 2010 enrollment data):
Total Enrollment: 9,710 full-time equivalent students
Total Pro-Forma Rated Debt: $461 million
Expendable Resources to Pro-Forma Debt: 0.3 times
Expendable Resources to Operations: 0.6 times
Average Operating Margin: 2.0%
Average Debt Service Coverage: 1.7 times
Monthly Liquidity: $ 91.5 million
Monthly Days Cash on Hand (unrestricted funds available within 1 month divided
by operating expenses excluding depreciation, divided by 365 days): 173 days
Percent of Revenues from State Appropriations: 33%
State General Obligation Rating: Aa2 with a Negative outlook
Series 2000B, Series 2001B, Series 2001C, Series 2002K, Series 2003I, Series
2007B: rated A2; insured by FGIC
Series 2004C, Series 2006G: rated A2; insured by MBIA
Series 2005D: rated A2; insured by Ambac
Series 2008B: rated A2; insured by Assured
Series 2010A and Series 2010B: rated A2
University: Richard Hale, Vice P President of Administration and Finance,
University: Joseph F. Scully, Associate Vice President of Administration and
Advisor: Joshua Nyikita, Acacia Financial Group, 856-234-2266
METHODOLOGY & LAST RATING ACTION
The principal methodology used in this rating was Methodology for Rating Public
Universities published in August 2007.
The last rating action with respect to Rowan University was on March 26, 2008
when the A2 and negative outlook were affirmed. That rating was subsequently
recalibrated to A1 on May 7, 2010.
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.
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.
Public Finance Group
Moody's Investors Service
Diane F. Viacava
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S DOWNGRADES ROWAN UNIVERSITY'S (NJ) BONDS TO A2 FROM A1 AND ASSIGNS A2 RATING TO $65 MILLION OF LEASE REVENUE BONDS, SERIES 2010A (BUILD AMERICA BONDS) AND $65 MILLION OF LEASE REVENUE BONDS, SERIES 2010B; OUTLOOK IS STABLE
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