THE UNIVERSITY HAS $107.2 MILLION OF RATED DEBT OUTSTANDING
University of Central Arkansas, AR
NEW YORK, Jun 3, 2011 -- Moody's Investors Service has upgraded the University of Central
Arkansas' (UCA's) revenue bond ratings to A2 from A3. The rating outlook is
stable at the new rating level. The rating action impacts the University's
outstanding debt detailed below.
SUMMARY RATING RATIONALE:
The A2 rating and stable outlook reflect UCA's healthy size, relatively strong
state support, return to healthy operations and progress in building liquid
reserves. The rating and outlook also incorporate some uncertainty around
achieving target enrollment given application declines in the coming fall and a
still modest balance sheet and liquidity cushion relative to peers.
*Sound market position as regional public university with Fall 2010 full-time
equivalent enrollment of over 10,000.
*Prudent fiscal management that has resulted in three consecutive years of
healthy operations (average operating margin of 4.2% from FY2008 through FY2010)
and recovery of liquid cash balances supporting debt and operations. Management
projects continued positive results for FY2011.
*Continued state support through basically stable annual appropriations from
FY2009 through budgeted FY2012, and robust annual scholarship support for
tuition through student grants of up to $4,500 per student annually.
*Thin balance sheet and liquidity. Despite solid progress by current management
to retain recent operating surpluses, resources and liquidity remain modest
compared to peers. Expendable financial resources provide a limited 0.17 times
coverage of debt and 0.15 times coverage of operations. Liquidity, at the close
of FY2010 also provided a modest 39 days cash on hand.
*Declining application volume resulting in 90% selectivity in the fall of 2010
with expectations for further weakening in fall of 2011 as a result of the
elimination of concurrent high school enrollment and uncertainty about the
impact of the new application fee. Achieving a target entering class of 2000 may
prove challenging in light of declining applications.
DETAILED CREDIT DISCUSSION
LEGAL SECURITY: The rated bonds are a general obligation of the Board of
Trustees, as well as secured by three distinct revenue pledges for the various
Series. For the Auxiliary Revenue Capital Improvement Bonds the additional bonds
test includes a 120% historical coverage requirement. For the Student Fee
Revenue Capital Improvement Bonds the additional bonds test includes a 110%
historical coverage requirement. For the Student Housing System Revenue Bonds
the additional bonds test includes a 125% historical coverage requirement. The
Housing System bonds have a debt service reserve requirement equal to average
annual debt service which is funded with cash.
INTEREST RATE DERIVATIVES: None; 100% fixed rate debt
MARKET: Moody's expects University of Central Arkansas to continue to experience
good student demand for its programs. UCA enrolled 10,002 full time equivalent
student (89% undergraduate) in the fall of 2010, down from 10,663 in the fall of
2008. A significant portion of the decline last fall was from losses in
concurrent enrollment of high school students with little revenue impact. For
the fall of 2011, management instituted a small application fee. In addition,
the previous practice of all regional graduating high school seniors
automatically applying to UCA has been discontinued. As a result, management
expects total application volume to fall significantly and yield on accepted
students to increase. Applications for the fall of 2011 are at 3,122, compared
to 4,005 in the fall of 2009. UCA accepted 3,418 students in the fall of 2010 in
order to reach target enrollment. While management notes particular strength in
housing deposits which are largely indicative of fall enrollment, Moody's notes
potential for stress on freshman enrollment in the fall.
Undergraduate tuition remains affordable especially in light of a
new state-funded lottery scholarship program which began in the fall of 2010.
In-state undergraduates will pay $7,182 in the coming academic year in tuition
and fees. With the typical lottery award of $4,500 per year, the net cost of
attendance will be dramatically reduced for those who maintain the merit and
academic progress qualifications.
OPERATIONS: UCA remains highly reliant on two major sources of revenue; student
charges were 55% of total revenues in FY2010 and state appropriations comprised
38%. Following healthy tuition revenue growth in FY's 2008 and 2009 given
managements tighter controls on discounting, FY's 2010 and 2011 saw more modest
growth of this line item, largely as a result of moderate enrollment
declines. Management expects net tuition revenue to grow at a modest healthy
pace going forward as a result of expectations for stable to increasing
enrollment. State appropriations have remained flat in FY 2011 from FY 2010 with
expectations for continued basically flat support in FY2012.
Following several years of weak financial control that resulted in
annual operating deficits and thin cash balances, UCA 's new management team has
now seen three consecutive years of healthy operations (average margin of 4.2%
for FY 2008-FY 210) providing average debt service coverage of 2.0 times, with
expectations of similar results for FY 2011. As a result, UCA has been able to
regain a comfortable level of liquidity. From negative cash balances (net of use
of an operating line of credit) 4 years ago, the University ended the 2010
fiscal year with $14 million of monthly liquidity, equating to a still modest,
but much improved 39 days cash on hand. Management projects that cash reserves
will increase to healthier $19.1 million at the close of the current 2011 fiscal
year and expects to maintain cash balances close to that level going forward.
BALANCE SHEET: Balance sheet resources have improved, but remain modest compared
to the level of outstanding debt. Expendable financial resources of $20.8
million provide a thin 0.2 times coverage outstanding debt of $121.2
million. Total financial resources of $45 million for FY 2010 include
$26 million of resources held by UCA's Foundation. The assets at the Foundation
($28.1 million at 3/31/2011) are invested in equity/fixed income allocations and
held by several different managers.
Our stable outlook reflects expectations for continued positive
operations resulting in maintenance of at least stable cash reserves. It is also
predicated on a basically stable student enrollment, healthy coverage of debt
service by pledged revenues and the ability to increase net student revenue over
What Could Change the Rating - UP
The rating could improve if the University continues to build financial reserves
and maintains student market strength and operating support from the State while
limiting additional debt.
What Could Change the Rating - DOWN
Decline in liquid cash position; deterioration in operating
performance; reduction in state support or student-derived revenues;
KEY INDICATORS (FY 2010 Financials, Fall 2010 enrollment)
Total Enrollment: 10,002 full-time equivalent students
Total Pro Forma Debt: $121.2 million
Total Financial Resources: $45.1 million
Expendable Resources to pro forma Debt: 0.17 times
Expendable Resources to Operations: 0.15 times
Average Operating Margin: 4.2%
Operating Cash Flow Margin: 12.8%
Monthly Liquidity: $14.4 million
Monthly Days Cash on Hand (unrestricted funds available within 1 month divided
by operating expenses excluding depreciation, divided by 365 days): 39 days
Reliance on State Funding: 37.8%
State of Arkansas GO Rating: Aa1, stable
Housing System Revenue Bonds Series 2007C: A2, insured by FGIC
Housing System Revenue Bonds Series 2006F, 2006A: A2; insured by Ambac
Student Fee Revenue Bonds, Series 2007B, 2004A, 2004B: A2, insured by FGIC
Student Fee Revenue Bonds, Series 2006E, 2006B, 2003A, 1998: A2; insured by
Auxiliary Revenue Bonds, Series 2007A: A2, insured by FGIC
Auxiliary Revenue Bonds, Series 2006D, 2006C, 2003B: A2; insured by Ambac
Auxiliary Revenue Series 2010A, Student Fee Series 2010B, Housing Series 2010C:
University of Central Arkansas: Diane Newton, Vice President for Finance &
Administration, (501) 450-3184
Underwriter: Edmond Hurst, Crews & Associates, Inc., (501) 978-7941
The principal methodology used in this rating was Public College and
Universities published in November 2006.
Information sources used to prepare the credit 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
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Public Finance Group
Moody's Investors Service
Dennis M. Gephardt
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S HAS UPGRADED THE UNIVERSITY OF CENTRAL ARKANSAS' RATING TO A2 FROM A3; OUTLOOK IS STABLE AT THE HIGHER RATING LEVEL
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