Fitch Affirms Baylor University, TX’s Revenue Bonds at ‘A+’

The following is from Fitch Ratings on September 24:

Fitch Ratings has affirmed its 'A+' long-term rating on the following bonds issued by or on behalf of Baylor University, TX:

--$200 million taxable fixed-rate bonds, series 2012A, issued by Baylor University;

--$232 millionWaco Education Finance Corp. fixed-rate revenue bonds;

--$94 millionClifton Higher Education Finance Corp. fixed-rate revenue bonds;

--$67.3 millionWaco Education Finance Corp. variable-rate demand revenue bonds (underlying rating).

Additionally, Fitch affirms its 'F1+' rating on Baylor's $50 million authorized taxable commercial paper (CP) program.

The Rating Outlook is Stable.

SECURITY

All bonds and the university's CP program are unsecured, general obligations of the university.

KEY RATING DRIVERS

INCREASED LEVERAGE BUT POSITIVE MARGINS: The 'A+' rating reflects a significant increase in debt since 2012, and associated carrying costs which have pressured Baylor's operating margins. Margins remain positive but in recent years are slimmer than historical levels.

ADEQUATE BALANCE SHEET: The university's balance sheet provides an adequate level of financial flexibility; available funds ratios remain consistent with the 'A' rating category for Fitch-rated private colleges and universities.

STRONG DEMAND SUPPORTS ENROLLMENT: Baylor's solid student demand and stable-to-growing enrollment supports operating performance, which relies significantly on net student revenue (about 68 percent of operating revenues). Both undergraduate and graduate enrollment have grown modestly over the last five years.

LONG-TERM FINANCIAL PLANNING: The university's management team engages in long-term financial planning, including internal forecasting to build reserves to help manage its $320 million of total bullet maturities in 2042 and 2043.

SUFFICIENT LIQUID RESOURCES: The 'F1+' rating is based on Baylor's ability to cover the maximum potential liquidity demands presented by its $50 million authorized taxable CP program by at least 1.25x from internal resources.

RATING SENSITIVITIES:

POSITIVE OPERATING MARGINS: Balanced or gradually increasing operating margins will continue to support the rating, especially as significant capital projects come online in the next four to five years and impact depreciation expense.

BALANCE SHEET STRENGTH: Declines in balance sheet ratios relative to peer institutions, while not expected, could pressure the rating. However, growth in balance sheet ratios over time relative to peer institutions, from a mix of operating surpluses, endowment appreciation and gifts, could have positive rating implications.

SUFFICIENT LIQUID RESOURCES: Baylor currently has liquid resources to support the 'F1+' short-term rating. Should these resources decline relative to self-liquidity debt, while unexpected, there would be negative short-term rating implications.

CREDIT PROFILE

Baylor was chartered by the Republic of Texas in 1845 and is the oldest continuously operating institution of higher learning within the state. It is the largest Baptist affiliated university in the world, and in fall 2014 offers undergraduate and graduate degrees to about 16,000 students at its Waco, Texas campus. The majority of students originate from within the state (about 72 percent in fall 2014). Student quality, as measured by average freshman SAT and ACT scores, is consistently stronger than national averages. Professional programs include business, engineering, law, theology and nursing. About 85 percent of students are undergraduates, and most attend full-time.

SOLID STUDENT DEMAND

The university's enrollment and demand trends remain favorable, which is important, since like many other private colleges and universities, Baylor is largely tuition-dependent. Student- generated revenues are typically 68 percent of fiscal operating revenues. Headcount has grown gradually over time, and increased again in fall 2014. Total enrollment was 16,264 in fall 2014, up 4 percent from the prior year, and up 11 percent since fall 2009. A record entering fall 2014 freshman class numbered 3,625, well above both the targeted 3,250 and last year's 3,190. Freshman application volume has grown a very strong 67 percent over the past six enrollment cycles, including nearly 16 percent in just fall 2014. The effect has been to gradually make Baylor's freshman admissions more selective. The fall 2014 acceptance rate for first-time freshman was 55 percent, which reflects significant improvement from 76 percent in fall 2010. However, the freshman matriculation rate remains consistently low around 19 percent-20 percent, indicating significant regional competition for Baylor's above-average student body.

POSITIVE OPERATING MARGINS

Baylor's operating margin (including the endowment draw) averaged a positive but slim 1.1 percent in the last four fiscal years (2011- 2014), which contrasts with a stronger 3.7 percent average margin between fiscal years 2008-2010. However, the margin for the fiscal year ending May 31, would have been $24 million (4 percent) instead of the audited $8.6 million (1.5 percent) except for a non-cash impairment of long-lived assets expense (related to the old stadium). Additionally, net tuition and fee revenue have increased each year since at least fiscal 2009, and the fiscal 2014 increase alone was a solid 8.5 percent. Fitch views this positively, particularly given Baylor's annual student fee increases (up 5.85 percent in fall 2014, and up an annual average of about 6.2 percent since 2009). Fitch views these fee increases as somewhat higher than those of many peer private universities, but notes management's strategic goal to reduce annual increases to 4 percent over time.

The university has again budgeted a surplus for fiscal 2015. Long- term financial plans, which Fitch views as historically conservative at Baylor, indicate modest but positive operating margins. Fitch views Baylor's long-term financial planning favorably.

SOLID BALANCE SHEET

Baylor's available funds (AF; defined as cash and investments not permanently restricted) rebounded in fiscal years 2014 and 2013. AF at May 31, was $696 million, equal to 127 percent of operating expenses ($547 million) and 111 percent of outstanding debt ($625 million). Fitch views these ratios as consistent with the 'A' rating category for private colleges and universities. A large, nearly 50 percent of Baylor's long-term investments ($1.2 billion at the end of fiscal 2014, which includes significant restricted net assets), were invested in alternative investments which tend not to be liquid. Another 15 percent were held by outside trusts.

HIGH DEBT LEVERAGE

Outstanding debt at May 31, totaled $625 million, including $15 million out of $50 million authorized CP. Of this total, only the CP and the $67.3 million series 2008A bonds were variable rate, about 13 percent of total debt. The series 2008A variable rate demand bonds are subject to a floating- to fixed-rate swap contract for a fixed rate of 2.48 percent. The $120 million series 2012 bonds and $200 million series 2012 taxable bonds are fixed rate, and structured with bullet maturities in 2042 and 2043. This highly deferred debt structure is somewhat mitigated by no new debt plans expected through 2022, an internal funding plan for the bullet maturities, and the relative market value of the endowment ($1.15 billion).

Current debt service in fiscal 2014 was approximately $33 million, increasing to roughly $36 million by fiscal 2018 and staying at that level through 2036. MADS, however, is a very high $215 million in 2042 (the second bullet maturity is $125.6 million in 2043). The fiscal 2014 current debt burden was 5.9 percent, which Fitch considers moderate to moderately high. The MADs burden (fiscal 2042) was 38 percent, which Fitch considers very high.

Management reports that Baylor has no new debt plans at this time, and expects to retain the size of its authorized $50 million CP program. Proceeds of the $320 million bonds issued in 2012 were used, in combination with gifts and internal funds, to construct a new football stadium (which opened in fall 2014), a new business building (under construction, to open in fall 2015), and other academic, research facility and dormitory capital projects.

FUNDRAISING

Baylor is not in a comprehensive campaign, but has achieved or is close to achieving fundraising goals for several large projects, including the new football stadium and business school. The current five-year CIP envisions fundraising of $320 million (for which a related campaign has just begun). This would include some capital projects but management reports it is primarily focused on strategic program goals including student retention, scholarships, and career placement initiatives. Baylor's last comprehensive campaign ended in 2004 and raised $537 million.

Additional information is available at 'fitchratings.com'

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria', dated May 12,;

--'Rating U.S. Public Finance Short-Term Debt', dated Dec. 9, 2013;

--'Fitch Affirms Baylor University, TX's CP Notes at F1+', dated Sept. 25, 2013;

--'Fitch Downgrades Baylor University (TX) Revs to 'A+'; Outlook Stable', dated Oct. 4, 2012.

Applicable Criteria and Related Research:

Rating U.S. Public Finance Short-Term Debt

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=724680

U.S. College and University Rating Criteria

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=748013

Additional Disclosure

Solicitation Status

http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=881134

((Comments on this story may be sent to newsdesk@closeupmedia.com))