New York, June 27, 2012 -- Moody's Investors Service has affirmed The Sage Colleges' (Sage or the college) B2 long-term debt rating on the Series 1999 fixed rate bonds and the B2 underlying rating on the Series 2002 variable rate demand bonds, issued through the City of Albany Industrial Development Agency (Albany IDA) and Rensselaer County Industrial Development Agency (Rensselaer IDA), respectively. The outlook remains negative.
SUMMARY RATING RATIONALE
The B2 rating and negative outlook for The Sage Colleges is based on extremely thin liquidity (23 days at close of fiscal year 2011) to support operations and demand debt, reliance on an operating line of credit for annual cyclical cash flow needs, and recent additional bank collateralization requirements for the Manufacturers and Traders Trust Company (M&T) operating line of credit to which funds were legally allocated from previously restricted endowment monies. The fact that nearly all of Sage's unrestricted funds are securitizing a cyclical cash flow operating line is a credit negative, ultimately placing the fixed rate bondholders in a subordinate position that could impact expected recovery in the event of default. The rating also considers the recent positive momentum in operating results, student demand and enrollment improvements, and fund raising successes driven by a focused management team.
*Frail balance sheet, including $2.6 million in monthly liquidity at the close of fiscal year (FY) 2011, with $5.5 million used during FY 2011 to pay off a bank term loan and heavy reliance on a line of credit to manage cyclical cash flow. Sage's reported monthly liquidity was 23 days in FY 2011, down from 86 days in FY 2010. Though mitigated during FY 2012 with new donor receipts and donor-restricted funds reclassified as unrestricted, substantially all unrestricted resources are held as collateral.
*Significant bank concentration with a letter of credit and a line of credit provided by Manufacturers and Traders Trust Company (rated A2/P-1). Further, the college's endowment assets are held at M&T and nearly all of Sage's unrestricted investments collateralize the full available $6.0 million line of credit.
*Heavy reliance on tuition and auxiliaries revenues at nearly 86% of Moody's adjusted operating revenues for FY 2011, though revenue streams are distributed among the four program-diverse Sage colleges.
*High concentration of private equity fund investments and manager concentration, with nearly 44% of the limited level of investments distributed among four managers in private, hedged and multi-strategy equity funds. The allocation is notable given the pooled endowment size of $20.5 million as of March 31, 2012.
*Improvement in financial performance in FY 2011, with the first positive operating margin of 1.5% (Moody's calculated) since FY 2007, as a result of new enrollment revenue and expense containment. Management projects a net surplus for FY 2012, up 58% over the same period last year. The three year average operating margin was negative 3.3%, operating cash flow margin was 8.6%, and overall debt service coverage was 2.5 times. Management has demonstrated the ability to achieve healthy increases of net tuition revenue through enrollment growth and control of discounting.
*Notable improvement in the market position of the college with 17.4% growth in full-time equivalent enrollment in the fall 2008 to fall 2011 period and management expectations for continued growth in the fall of 2012 despite the challenging climate.
*Improved donor support with $25 million raised since May 2011, a marked contrast to the three-year annual average of $4.7 million in FY 2011. The gifts include $20 million of support received in March and April 2012, which though largely earmarked for capital projects, more than $7 million will be directed to endowment. Management expects continued strength in donor support in the next few years during the current comprehensive campaign.
*Focused and strategically aligned governance and management teams that understand the key challenges are building a track record of success.
*Absence of debt derivatives, as a swap on the series 2002 bonds expired on March 1, 2012.
The negative outlook reflects Moody's expectation that The Sage College's will continue to face thin liquidity over the short to medium term along with a competitive student market environment. These factors are partially offset by the recent trend of net tuition revenue growth and fundraising gains driven by focused and strategically aligned governance and management teams.
WHAT COULD CHANGE THE RATING UP
Sustained balanced operations in the near term; significant improvement in liquidity position and non-reliance on external liquidity for operations; removal of bank collateralization of unrestricted liquidity; extraordinary donor support
WHAT COULD CHANGE THE RATING DOWN
Return to operating deficits and deterioration of unrestricted assets; inability to increase net student revenue, continued deterioration in liquidity; inability to access needed liquidity; downgrade of M&T Bank and resulting acceleration of debt repayment by Sage
The principal methodology used in this rating was U.S. Not-for-Profit Private and Public Higher Education in August 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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