New York, July 01, 2021 -- Moody's Investors Service has assigned a Aa3 rating to Oberlin College's proposed $81 million Taxable Bonds, Series 2021A (Green Bonds - Climate Bonds Certified) and $29 million Taxable Bonds, Series 2021B. The bonds have an expected final maturity in fiscal 2052. Moody's also maintains Aa3 ratings on outstanding debt. The outlook is stable. Oberlin has outstanding debt of about $195 million.
RATINGS RATIONALE
Assignment and maintenance of Oberlin College's Aa3 rating incorporates its very good strategic positioning with a favorable brand, sizeable wealth and liquidity, and solid financial reserve coverage of pro forma debt and expenses. With strong fiscal year-to-date investment returns and continued favorable donor support, the college is poised to surpass $1.2 billion in total cash and investments for fiscal 2021, which will help absorb the additional $80 million of incremental new debt. This financial reserve growth will further strengthen the college's spendable cash and investments to expenses, which was at 3.4x for fiscal 2020. Further, despite challenging revenue conditions, effective financial management will help the college sustain operating cash flow margins in the mid-teens over the longer-term. While changes to a three semester 2020-2021 academic year will add volatility to operating results for fiscal 2021 and fiscal 2022 due to the accounting treatment for certain revenues, Moody's expects operating cash flow margins to average in the low- to mid-teens over this period.
Credit challenges include highly competitive student market conditions and thin debt affordability from operations. Weak regional demographics and elevated competition will continue to suppress pricing flexibility. Further, the college has a high age of plant at just over 19 years, which indicates the presence of deferred maintenance and additional capital needs, partly addressed with the Series 2021 bonds. Despite an annual enrollment decline for academic year 2020-2021 of about 6.5%, the college is poised to stabilize enrollment for fall 2021 based on positive trends in application volume and early decisions.
RATING OUTLOOK
The stable outlook reflects Moody's expectations that leadership will successfully execute a multifaceted strategy intended to strengthen longer-term net tuition revenue growth and financial performance. It also reflects Moody's expectations of continued strong liquidity, maintenance of strong spendable cash and investments' coverage of debt, and operating cash flow margins averaging mid-double digits between fiscal 2021 and fiscal 2022.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING
- Outsized improvement in strategic positioning, reflected by indications of sustained strengthened student demand and pricing power along with significant increases in donor support
- Significant growth in financial reserves and liquidity, further strengthening coverage of debt and expenses
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING
- Inability to sustain operating cash flow margins in the mid-teens beyond fiscal 2021
- Material increase in financial leverage or weakening in debt affordability from operations
- Significant weakening in monthly days cash on hand
LEGAL SECURITY
All bonds are unsecured general obligations of the college.
USE OF PROCEEDS
Proceeds from the proposed Series 2021 bonds will be used to finance about $80 million of costs associated with a conversion from a steam energy system to a low temperature hot water system using an optimized and carbon-free geothermal source. In addition, proceeds will also be used to refund a portion of the outstanding Series 2013 and Series 2017 bonds, and finance the costs of terminating an interest rate swap agreement. The college will structure the refunding to realize the savings during fiscal 2022 to fiscal 2025.
PROFILE
Oberlin College is a nationally selective private liberal arts college, with a renowned conservatory of music enrolling about 2,700 full-time equivalent students. Founded in 1833, it was the first coeducational college in the United States. It is located in Oberlin in northern Ohio approximately 35 miles from Cleveland, Ohio.
METHODOLOGY
The principal methodology used in these ratings was Higher Education published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1175020. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.
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Christopher Collins
Lead Analyst
Higher Education
Moody's Investors Service, Inc.
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Susan Fitzgerald
Additional Contact
Higher Education
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Client Service: 1 212 553 1653
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