Fitch and Moody’s recently updated the ratings of several Higher Education institutions in Indiana, Washington, South Carolina, and Texas.
Gonzaga University was given an ‘A+’ rating on its $9,475,000 Revenue Bonds Series 2022 and $32,030,000 Refunding Revenue Bonds Series 2023. In assigning said rating, Fitch Ratings explained:
The ‘A+’ IDR and revenue bond rating reflect Gonzaga’s history of solid demand and market positioning as a comprehensive Jesuit university in the pacific northwest region, which has supported consistent enrollment, a favorable fundraising track record, solid operating results, and moderate leverage. Gonzaga’s reliance on student fee revenue, which fell in fiscal 2021 before rebounding in fiscal 2022, as well as a relatively modest level of liquidity and wealth compared to peers are tempering factors in the ‘A+’ rating. Gonzaga’s endowment returned over 48% in fiscal 2021, and the university should close fiscal 2022 with slightly stronger than budgeted operating results.
Clemson University was given a ‘AA’ rating on approximately $261 million series 2015 and series 2015B higher education revenue bonds. In affirming the rating, Fitch Ratings reasoned:
The ‘AA’ bond rating and IDR reflect Clemson’s strong financial profile, solid and consistent cash flow margins despite continuing cost pressures, and moderating capital plans after a period of significant growth and capital investment. Clemson has benefitted from growth in applications, strong retention, improving graduation rates, and growth in overall enrollment which has been resilient throughout the pandemic. Continued improvement in key demand components (selectivity, matriculation, geographic reach, student quality, etc.), as well as an expectation for continued growth in net tuition revenue, are favorable considerations. Fitch considers the higher education revenue bonds’ credit quality to be on par with Clemson’s general credit quality due to the relatively broad pledge of gross university fee receipts in addition to net auxiliary revenues.
Indiana University Health was given a ‘AA’ rating on its approximately $1.5 billion of bonds issued by the IU Health, Inc. Obligated Group, and Indiana Finance Authority for the IU Health Obligated Group. Fitch Ratings reported:
The ‘AA’ IDR and revenue bond rating reflect IU Health’s long track record of strong operating margins and a credit profile that is further sustained by a remarkably solid balance sheet. IU Health’s revenue defensibility is enhanced by its role as the largest healthcare system and academic medical center in the state. Its partnership with IU School of Medicine (the largest medical school in the country) boosts IU Health’s brand and clinical research, making it a destination for complex care in Indiana and the market leader in its broad service area.
IU Health continues to execute on its sizable capital plans to expand the system’s footprint and add capacity at certain facilities in addition to an already robust routine capital reinvestment schedule. IU Health has long planned these investments, ensuring that its balance sheet was solidly positioned to accommodate the capex and additional debt.
Lastly, Caa2 rating was given assigned to New Hope Cultural Education Facilities Finance Corporation, TX’s Student Housing Revenue Bonds Series 2015A and Series 2015B. In downgrading the rating from Caa1, Moody’s explained:
The downgrade to Caa2 from Caa1 reflects the impending default by Park West (the “Project”) on its July 1, 2022 scheduled debt service. Park West’s partial payment for $8.5 million represents only 56% of the $15.265 million due in principal and interest. Other contributing factors include the depletion of virtually all liquidity, the balance sheet’s structurally imbalanced position, and other legal claims against the property. Following the June 30, 2022 Forbearance Extension Option Date, the bond trustee has the right to accelerate the debt according to the Second Standstill and Forbearance Agreement; however, the Borrower (NCCD College Station Properties LLC) believes this to be a remote possibility. As such, the rating also incorporates a reduced expected recovery should a forced asset sale occur. In our view a distressed sale of the property would yield a recovery value below 90%.
The Project’s financial distress is directly linked to prolonged weakness within its College Station, Texas student housing submarket which has been an ongoing problem since Park West opened for Fall 2017. Starting with the July 2018 bond payment, Park West has regularly drawn on all sources of liquidity including the Debt Service Reserve (DSR) fund. The July 1, 2021 bond payment relied on a $7.5 million withdrawal from the DSR, and as of April 30, 2022 Park West’s remaining reserves totaled merely $64,000 in aggregate.
