NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the following bonds issued on behalf of Stockton University.
-- $211 million of New Jersey Educational Facilities Authority (EFA) Revenue and Refunding Bonds, series 2016A;
-- $70 million Atlantic County Improvement Authority (ACIA), Stockton University General Obligation Lease Revenue Bonds (Atlantic City Campus Project), series 2016A.
The EFA bonds will sell via negotiation on or about the week of June 27. Proceeds will refund outstanding EFA bonds for savings (2006F, 2007G, 2008A), fund about $25 million of capital projects at the main Galloway campus, and pay costs of issuance.
The ACIA bonds will sell via negotiation on or about the week of July 11. Proceeds will fund a portion of the construction costs of a residence hall and a parking garage to be constructed in Atlantic City, NJ and pay costs of issuance.
In addition, Fitch has downgraded $203 million of EFA bonds issued on behalf of Stockton to 'A' from 'A+'.
The Rating Outlook has been revised to Negative from Stable.
SECURITY
EFA and ACIA bonds are ultimately a general unsecured obligation of Stockton, payable from legally available funds.
KEY RATING DRIVERS
WEAKENED FINANCIAL POSITION: The downgrade to 'A' reflects deterioration in Stockton's balance sheet strength due to capital spending, operating losses and material new debt. The Negative Outlook reflects Fitch's expectation of continued negative operating results over the near term.
OPERATING DEFICITS: Stockton's operating results have been negative since fiscal 2014, including a sizeable full-accrual operating deficit in fiscal 2015. Fiscal 2016 results are expected to improve somewhat and generate positive cash flow but will remain negative on a full-accrual basis.
HIGH DEBT BURDEN: A high debt burden constrains financial flexibility. Current debt service coverage was less than 1x in 2015 and is expected to be slim in 2016; material revenue growth is required over the next five years to achieve 1x coverage of pro forma MADS.
HEALTHY DEMAND AND ENROLLMENT: Stockton's sound regional market position and academic quality support healthy demand and stable enrollment trends. The solid demand profile provides some flexibility to generate additional revenues, which, together with good expense management, could contribute to operating balance and support Stockton's increased debt load over time.
RATING SENSITIVITIES
IMPROVED OPERATIONS: Stockton University's inability to achieve incremental improvement toward balanced full-accrual operating results in fiscal years 2016 and 2017 would likely lead to a negative rating action.
ADDITIONAL DEBT: Fitch does not believe Stockton has further debt capacity at the current rating level. Additional debt without a commensurate increase in revenues or resources would negatively pressure the rating.
CREDIT PROFILE
Stockton was founded in 1971 and achieved university status in 2015. The 1,600-acre main campus is located in the Pomona section of Galloway Township, NJ, 12 miles northwest of Atlantic City. The university also owns the nearby Seaview resort, which it purchased in 2010, and operates several instructional sites around southern New Jersey, including in Atlantic City.
ATLANTIC CITY PROJECT
The ACIA bonds will finance a portion of a 521-bed residence hall and a seven-story parking garage to be constructed in Atlantic City, which are part of a larger public-private partnership aimed at local redevelopment. The facilities will be located near the beach and boardwalk in the midtown area of Atlantic City. Stockton will also use internal funds and a state grant to fund construction of an academic building at the same site to complete its urban campus.
In total, Stockton will contribute approximately $70 million of debt and about $18 million of equity, compared to an estimated total project cost of about $166 million. The remainder will be funded from state and county agencies, a non-profit development corporation, and a locally headquartered corporation. Successful execution and occupancy of the Atlantic City projects could improve the university's operations over time. However, the debt structure requires material net revenue growth over the next five years, which is a structural risk. Fitch's rating evaluates Stockton's overall ability to service its debt from consolidated operations in line with the bonds' general revenue pledge.
WEAKENED FINANCIAL POSITION
Stockton's somewhat weak financial position has deteriorated in recent years due to capital spending from internal funds and operating losses and will be further pressured by the new debt. Available funds (defined by Fitch as unrestricted cash and investments) fell to $69.8 million at June 30, 2015 from $104.2 million the prior year. The decline includes the purchase of the Showboat casino for about $18 million. The casino has since been sold, but proceeds will largely be reinvested in the Atlantic City academic building and will not significantly increase available funds.
Available funds provide limited cushion, equal to a somewhat low 32.1% of fiscal 2015 expenses and a weak 21.4% of pro forma debt. This compares negatively to available funds equal to 52.9% of expenses and 41.1% of debt in 2014. Management considers 2015 a low point and expects to rebuild resources somewhat over time, including from reimbursements from outlays ahead of capital grants. However, Fitch expects that available funds ratios will remain below historical levels over the near term.
OPERATING DEFICITS
Stockton's operating results have been negative on a full accrual basis since fiscal 2014, following a trend of moderately positive results in prior years. The operating margin weakened to negative 2% in fiscal 2014; in fiscal 2015 it weakened further to negative 8.1%, exacerbated by accounting changes to include full net pension expense in operations. Excluding the effect of the accounting changes, Fitch estimates the operating margin still weakened significantly to approximately negative 6%.
Weaker margins in 2014 mainly reflect expenses outpacing revenue growth, as well as the operation of the Seaview resort, which generates positive and improving cash flow but does not cover its full depreciation expense. Significant expense growth drove much weaker 2015 results, largely attributable to the university's purchase of the Showboat casino and subsequent associated legal costs. Fiscal 2016 results are expected to improve and generate positive cash flow but will remain negative on a full-accrual basis. Failure to improve toward balanced full-accrual operating results in fiscal years 2016 and 2017 would likely lead to negative rating action.
HIGH DEBT BURDEN
Stockton's high debt burden constrains its financial flexibility. In fiscal 2015, debt service equaled a high 9.5% of operating revenues, while pro forma MADS (2023) equaled a very high 11.9% of fiscal 2015 operating revenues. Stockton's aggregate debt service is expected to remain roughly unchanged through 2021 to accommodate construction and ramp-up of the Atlantic City project before escalating to MADS of $24.6 million by 2023.
Stockton expects to make slightly over 1x debt service coverage in fiscal 2016, after generating 0.7x coverage in fiscal 2015. However, projected fiscal 2016 MADS coverage remains below 1x. While the Atlantic City project will be revenue-generating for Stockton, material net revenue growth and sustained operating improvement are required to adequately support the new debt. Fitch does not consider Stockton to have additional debt capacity beyond existing plans at the current rating level. New debt without a commensurate increase in available revenues or resources would negatively pressure the rating.
HEALTHY DEMAND AND ENROLLMENT
Stockton has a consistent track record of healthy enrollment trends and solid demand due to its sound regional market position and good academic quality. Headcount has grown by a steady 1.7% per year on average since fall 2011 to 8,674 in fall 2015. Drawing students mostly from in-state and primarily from the South Jersey region, Stockton is primarily (90%) undergraduate and remains a teaching-focused institution where 94% of students attend full-time.
Admission statistics are also sound. Stockton maintains moderate selectivity (64.4% freshman acceptance rate), a solid matriculation rate (32.6%), above-average student quality and strong retention. Fitch believes Stockton's demonstrated student demand and mid-range tuition relative to in-state peers support flexibility to generate some additional revenue through tuition adjustments and enrollment growth, including at the Atlantic City campus.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. College and University Rating Criteria (pub. 12 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1007875
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