By Jeff Murphy, July 3, 2018
WARRENSBURG, MO – In its annual review, Standard & Poor’s (S&P) Global ratings affirmed
the University of Central Missouri’s bond rating of “A+” for all currently outstanding
bonds and for two issues planned this fall. Although UCM’s dedication to sound financial
operations contributed to its ability to retain the same overall letter rating from
Standard & Poor’s (S&P) Global Ratings for the third consecutive review, S&P changed
its outlook rating to reflect current and future financial pressure on the university.
S&P notified UCM that it is assigning its “A+” long-term rating to the Missouri Health and Educational Facilities Authority’s (MOHEFA) series 2018A revenue bonds and 2018B refunding bonds. It also affirmed the same rating on the 2013B-2, 2013C-2, and 2012A educational facilities revenue bonds. The outlook on all of these bonds, however, was changed to “negative” from “stable.”
“We assessed UCM’s enterprise profile as strong characterized by a historically respectable demand profile with improving selectivity, and reasonable matriculation. We assessed its financial profile as solid, with consistently positive operations on a cash basis, good available resources, and a reasonable debt burden,” S&P noted in its written rationale. “Combined, we believe these credit factors lead to an indicative stand-alone profile of ‘a+’ and final rating of ‘A+’.”
Rationale provided by S&P attributes the negative outlook to the rating organization’s view on enrollment declines which took place in Fiscal Years 2016 and 2017 after several years of growth, and expectations for continued enrollment pressure for fall 2018. This is in addition to an operating deficit generated in Fiscal Year 2017, due to reduced state funding; a drop in international graduate students over the past two years; and expectations for another deficit for FY 2018.
S&P Global Ratings provide a forward-looking opinion about a borrower’s credit worthiness and ability to repay debt using a letter-grade system. “AAA” is the best rating that can be given for a borrower’s ability to repay long-term bonds. A long-term credit issue rating of “A” means that the organization being rated is more susceptible to adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories, but the borrower’s ability to meet its financial commitments is still strong.
A “negative’ outlook indicates a possibility that a rating could be lowered if there is a decline in enrollment and the university’s financial operations also are adversely affected. If the university maintains its operational resource levels and enrollment challenges dissipate, the outlook over the next two years could return to “stable.”
“We have faced significant financial hurdles, but the ability to continue to maintain a final rating of a stand-alone profile of ‘a+’ and a final rating of ‘A+’ for the second consecutive year is a direct reflection of our campus-wide commitment to strong management of our capital financing for projects that benefit our students. It also demonstrates our good stewardship with limited financial resources,” said UCM President Chuck Ambrose. “As we enter Fiscal Year 2019, we continue to work strategically to ensure we’re meeting our priorities in the areas of academic performance, student success and sustainability. We are confident that we are heading in the right direction, knowing our success impacts on our future S&P rating and our ability to secure financing for future projects that will benefit our students.”
Bonds that were rated by S&P were used for various projects to improve the campus learning-living environment. The 2013B-2 bonds were issued for improvements at Audrey Walton Stadium at Vernon Kennedy Field for extensive renovation on the lower level of the stadium. Series 2013C-2 educational facilities revenue bonds made possible construction of The Crossing – South at Holden, the university’s first retail-student housing project, and the 2012A revenue bonds, which were retired in October 2017, were issued to refinance the series 2002 University Housing system energy savings and library bonds. Additionally, Series 2018A revenue bonds will finance improvements to the Elliott Student Union, including a new south entrance and a new auditorium. Series 2018B bonds will be used to refund series 2013B.
S&P noted that its rating of UCM’s educational facilities revenue bonds reflects its view of the university including factors such as historically sound financial operations, with the university typically producing operating surpluses on a cash basis; healthy available resources, with adjusted unrestricted net assets equal to 40 percent of adjusted operating expenses and 92.8 percent pro forma debt; and no additional debt plans during the outlook period.
According to S&P Global Ratings, UCM’s total pro forma debt equaled $99.5 million as of June 30, 2017. This included Series 2018A revenue bonds of $7.6 million in new money and the series 2018B-2 $3.8 million in refunding bonds, $65.9 million of revenue bonds and a $22.9 million energy savings capital lease issued in April 2009 for deferred maintenance to buildings on the main campus.
“The university has a front-loaded debt structure, which amortizes over 20 years, that, in our view, somewhat mitigates its above-average debt burden,” S&P noted in its rationale. “All of UCM's debt is fixed-rate. Management reports no other additional debt plans without at least commensurate growth in available resources during our outlook period.”