Samford University, AL -- Moody's Affirms A3 rating on Samford University's Series 2001 and 2007A revenue bonds; outlook remains negative
New York, December 07, 2012 -- Moody's Investors Service has affirmed the A3 rating on Samford University's$30.8 million of Series 2001 and Series 2007A revenue bonds. The outlook remains negative.
SUMMARY RATING RATIONALE
The A3 rating is based on the university's established student market position, diversified undergraduate, graduate, law and pharmacy programs with growing net tuition revenue. It also reflects positive cash flow from operations producing ample debt service coverage, healthy gift support, and adequate liquidity. Credit challenges include increased debt burden over the last four years, the majority of it variable rate debt with covenant requirements, a thin balance sheet cushion and a growing unfunded pension liability; although the university is planning to decrease its variable rate exposure through a refinancing in early 2013 and will soft-freeze its defined benefit pension plan as of December 31, 2012.
The negative outlook reflects the university's increased debt, continued elevated exposure of variable rate debt and potential risks of debt acceleration due to violations of financial covenants, coincident with a sizeable pension obligation. Despite these risks, we note that Samford has not relied on its operating line of credit in three years, has implemented a plan to close its defined benefit plan, anticipates refinancing certain demand obligation debt early in 2013, and has no near term borrowing plans.
*Stable student market position for this private university that is one of largest in the US with a Southern Baptist affiliation, located in the Birmingham, Alabama metropolitan area, reflecting consistent enrollment levels (4,538 full-time equivalent (FTE) enrollment in fall 2012) and steady net tuition revenue growth.
*Near breakeven operating performance in fiscal year (FY) 2012, but recent positive performance, provided an average FY 2010 to FY 2012 operating margin of 3.7%, operating cash flow margin of 12.7% and healthy debt service coverage of 3.4 times. FY 2013 has been budgeted for a modest surplus and is currently on pace. The improved performance has allowed the university to reduce its reliance on an operating line of credit.
* Healthy liquidity with monthly unrestricted cash and investments of $109 million providing 329 days of operating expenses for FY 2012.
* Solid gift revenue with average FY 2010 to FY 2012 gift revenue of $3,233 per student, including ongoing support from the Alabama Baptist Convention (approximately $4.8 million annually) and contributions from the $200 million "A Campaign for Samford" publically launched in October 2009, which has raised $149 million ($111 million cash and $38 million pledges) as of September 30, 2012.
* A planned debt restructuring early in calendar year 2013 will refinance some prior variable rate debt to fixed rate during calendar year 2013, which will reduce the university's variable rate debt exposure to 50% from 79% of total outstanding debt. The university has no additional new money borrowing plans at this time.
*Variable rate debt comprises 79% of the pro forma debt total of $149.6 million and the $19.7 million Series 2010A bonds have a bank put option on December 1, 2013 and annually thereafter. The letter of credit on the Series 2008A bonds have a stated termination date of November 1, 2013. Samford plans to refinance the Series 2010A bonds and a portion of the Series 2008A bonds in early 2013 to a fixed rate mode, reducing the variable risk exposure.
*Underfunded defined benefit (DB) pension plan, with only 62% funding per GAAP (84% funded according to the IRS Special Funding Target Attainment Percentage (FTAP), which guides funding requirements) or $62 million underfunded, although the Board of Trustees recently voted to freeze new entrants to the DB plan as of 12/31/12, phase in a new defined contribution plan thereafter, and eventually seek to annuitize the DB plan. Samford has been making supplemental endowment draws to make additional contributions to the DB plan.
*Highly leveraged balance sheet with limited debt capacity and a thin resource cushion relative to comparably rated institutions. In July 2012 (FY 2013), Samford issued $25 million in a private bank loan to build new residence halls. Operating leverage has increased, with debt to operating revenues of 1.1 times as compared to a median of 0.7 times for A-rated private universities. Pro forma debt of $149.6 million is cushioned by expendable financial resources only 0.42 times. We note financial resources are depressed by $62 million of liabilities associated with the university's defined benefit pension plan.
The negative outlook reflects the university's increased debt, continued elevated exposure of variable rate debt and potential risks of debt acceleration due to violations of financial covenants, coincident with a sizeable pension obligation. We note that the university has near term plans that may positively impact these credit attributes including a plan to close its defined benefit plan. Management also anticipates refinancing certain demand obligation debt early in 2013.
WHAT COULD CHANGE THE RATING UP
Not likely in the near-term; significant and sustained improvement in operating performance and cash flow; meaningful growth of financial resources, strengthening of student demand, particularly at the undergraduate level; further reduction in debt structure risks.
WHAT COULD CHANGE THE RATING DOWN
Further weakening in operating performance and cash flow; deterioration in student market position or financial resources; covenant violation or increased likelihood of covenant violation within letter of credit reimbursement agreements or bank agreements; potential material increase in debt with unscheduled put potential relative to the university's liquidity.
PRINCIPAL RATING METHODOLOGY
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.
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