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Fitch Downgrades Baylor University (TX) Revs to 'A+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A+' rating to approximately $200 million Baylor University taxable fixed rate bonds, series 2012A.

The bonds are expected to be sold via negotiation on or about the week of Oct. 15, 2012. Proceeds will be used to fund construction of a new football stadium, an academic building, a research facility and other capital projects as well as to pay associated costs of issuance.

In addition, Fitch takes the following rating actions:

--$232.1 million Waco Education Finance Corporation fixed rate revenue and revenue refunding bonds, downgraded to 'A+' from 'AA-';

--$100.145 million Clifton Higher Education Finance Corporation fixed rate revenue bonds, downgraded to 'A+' from 'AA-';

--$71.8 million Waco Education Finance Corporation variable rate demand revenue bonds (underlying rating), downgraded to 'A+' from 'AA-'; and

--$50 million taxable commercial paper (CP) program, affirmed at 'F1+'.

The Rating Outlook is Stable.

SECURITY

The series 2012A bonds will be issued on parity with the university's outstanding bonds. All bonds and the university's CP program are unsecured, general obligations of the university.

KEY RATING DRIVERS

INCREASED LEVERAGE DRIVES DOWNGRADE: The downgrade to 'A+' from 'AA-' reflects a material increase in outstanding debt and associated carrying costs which will pressure the university's recently reduced operating surpluses and financial cushion.

FINANCIAL FLEXIBILITY REMAINS: The university's still-positive operations and existing balance sheet resources continue to provide an adequate level of financial flexibility, particularly given the university's strong demand profile and stable enrollment.

STRONG DEMAND SUPPORTS ENROLLMENT GOALS: Baylor's consistently solid student demand provides a strong basis for the university's enrollment goals, which focus largely on maintaining the incoming freshman class size at the current level (fall 2012) and improving student retention.

ACTIVE, LONG-TERM FINANCIAL PLANNING: The university's management team engages in detailed long-term financial planning including consideration of an internal amortization schedule for its non-amortizing debt obligations while maintaining balanced operations.

SUFFICIENT LIQUID RESOURCES: The 'F1+' rating is based on Baylor's ability to cover the maximum potential liquidity demands presented by its variable rate debt programs by at least 1.25 times (x) from internal resources.

CREDIT PROFILE

The issuance of additional debt totaling $120 million of tax-exempt bonds earlier in 2012 has put pressure on Baylor's annual operations, driving interest costs up by 23.6% from fiscal 2010 to fiscal 2012, albeit from 2.7% of annual operating expenses in fiscal 2010 to 3.0% in fiscal 2012. Operations have consequently narrowed to just above break-even in both fiscal 2011 and 2012. Further, the university's financial cushion vis-a-vis operating expenses and total outstanding debt has narrowed. While these issuances have resulted in an overall decline in the university's financial flexibility, Fitch has considered the university's conservative, long-term financial planning as a significant mitigating factor to-date.

The issuance of the series 2012A bonds, however, will further limit financial flexibility over the intermediate term. Operations are expected to continue to reflect pressures from debt carrying charges until fiscal 2015. Despite maintaining balanced operations, the slimmer margins will contribute to slower growth in available funds, which provide an additional level of financial cushion against annual operating expense and debt-related obligations. While Fitch continues to view management's careful planning favorably, Fitch believes that the university's post-issuance risk profile is consistent with an 'A+'.

The university's enrollment and demand trends, which are integral to the university's ability to generate stable operating revenues, are favorable. Like many other private colleges and universities, Baylor is a highly tuition-dependent institution. On average, student-generated revenues provide 70% of the university's total annual operating budget. Headcount enrollment has grown consistently over time, reaching 15,364 in fall 2012 (a cumulative increase of 5.7% over the last five enrollment cycles). Similarly, application volume has shown a very strong 63.6% increase over the past five enrollment cycles, allowing the university to increase its selectivity.

Baylor was chartered by the Republic of Texas on Feb. 1, 1845 and is the oldest continuously operating institution of higher learning within the state. It is the largest Baptist university in the world, and offers undergraduate and graduate degrees to 15,364 headcount students at its campus in Waco, Texas. Though the majority of students originate from within the state, student quality (as measured by average SAT score) well exceeds the state and national averages (1234 for fall 2012 at Baylor vs. 973 and 1010, respectively).

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 12, 2012;

--'U.S. College and University Rating Criteria', dated May 25, 2012;

--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity', dated June 15, 2012.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679152

Criteria for Assigning Short-Term Ratings Based on Internal Liquidity

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681822

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Fitch Ratings
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Source: Fitch Ratings