Lafayette College, Pennsylvania Northampton County General Purpose Authority; Private Coll/Univ - General Obligation

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1 Lafayette College, Pennsylvania Northampton County General Purpose Authority; Private Coll/Univ - General Primary Credit Analyst: Gauri Gupta, Chicago ; gauri.gupta@spglobal.com Secondary Contact: Jessica L Wood, Chicago (1) ; jessica.wood@spglobal.com Table Of Contents Rationale Outlook Enterprise Profile Financial Profile MAY 23,

2 Lafayette College, Pennsylvania Northampton County General Purpose Authority; Private Coll/Univ - General Credit Profile US$160.0 mil coll rfdg and rev bnds (Lafayette College) ser 2017 due 11/01/2047 Long Term Rating A+/Stable New Northampton Cnty Gen Purp Auth, Pennsylvania Lafayette Coll, Pennsylvania Northampton Cnty Gen Purp Auth (Lafayette Coll) RMKTD 11/14/16 variable rate rev bnds (Lafayette Coll) Long Term Rating A+/A-1/Stable Downgraded Rationale S&P Global Ratings has assigned its 'A+' rating to the Northampton County General Purpose Authority, Pa.'s series 2017 revenue bonds, issued for Lafayette College. At the same time, we lowered our long-term ratings on the authority's series 2013A, 2013B, and 2008 bonds to 'A+' from 'AA-'. We also lowered our short term rating to 'A+/A-1' from 'AA-/A-1+' on the authority's series 1998A, 2003, 2006, and 2010A bonds, also issued for the college. Finally, we lowered our rating on the authority's series 2003 and 2006 variable-rate college revenue bonds, also issued for the college, to 'A+/A-1' from 'AA-/A-1'. The outlook on all the ratings is stable. The rating's short-term component represents our opinion of the likelihood of the payment of tenders and reflects liquidity facilities in the form of standby bond purchase agreements (SBPAs) from U.S. Bank N.A. for the series 2003 bonds, and by TD Bank N.A. for the series 2006 bonds effective Nov. 14, The downgrade reflects our view of the weakened balance-sheet resources as a result of the issuance of $70 million to support the development of an integrated science building and various other capital projects. In our opinion, the college has an aggressive debt structure with several bullet maturities and a high maximum annual debt service (MADS) burden, although we recognize that it has a large endowment and credible plan to cover all bullet payments. We assessed Lafayette's enterprise profile as very strong, based on its solid market position and demand characteristics with solid selectivity and retention rates, coupled with good matriculation rates. We assessed the financial profile as strong, characterized by improving operation with fiscal 2016 ending in a full-accrual surplus and expectations of similar results for fiscal 2017 and good revenue diversity. Despite these strengths, we recognize that the college's balance-sheet resources have weakened due to the issuance of additional debt and increased the pro forma MADS burden to above average. Combined, these credit factors lead to an indicative stand-alone credit profile of 'a+' and a final rating of 'A+'. The 'A+' rating reflects our assessment of the college's: MAY 23,

3 Healthy and stable enrollment profile with sound selectivity and matriculation rates, and robust retention and graduation rates consistent with the rating category; Geographically diverse student body, with less than 20% coming from within the state; Improving financial performance with fiscal 2016 ending in a full-accrual surplus and similar expectations for fiscal 2017; and Proactive management team that is working toward achieving its strategic goals. Offsetting credit factors include Lafayette's: Weaker balance sheet compared to historical trends, with 169% expendable resources to pro forma debt and 224.6% to operating expenses as of fiscal 2016; and Elevated pro forma MADS of 8.15%, which assumes smoothing of several bullet maturities. Total pro forma debt for Lafayette is $264 million. We understand the college plans to use the proceeds of the bonds for financing an integrated sciences building for academic programs in the STEM curriculum and for the advance refunding of its series 2008 bonds. Lafayette is an undergraduate, liberal arts, and engineering college near the Delaware River on the New Jersey border. It occupies a 110-acre campus just north of Easton. Chartered in 1826, Lafayette admitted its first class in The college attracts the majority of its students from New York, New Jersey, and Pennsylvania; the percentage, however, is down from historical levels. Lafayette competes primarily with other private selective institutions in Pennsylvania; the three leading schools in terms of cross applications are Lehigh, Bucknell, and Villanova universities. Securing the bonds is a general obligation of the college. Outlook The stable outlook reflects our expectation that enrollment will continue to grow as projected by management while Lafayette maintains the demand metrics. We also expect the college to maintain its financial performance and produce full-accrual surpluses in the future. Additionally, we expect financial resources to remain at least at current levels and any additional debt will be supported by commensurate growth in resources. Downside scenario We could consider a negative rating action over the next years if there is any significant weakening of operating performance or deterioration in financial resources from current levels with respect to annual operating expenses or debt. We would also expect any significant additional debt during the next two years to be commensurate with an increase in financial resources. Upside scenario Although unlikely during the outlook period, we could consider a positive rating action if the college's financial resource ratios demonstrate growth to levels more consistent with a higher rating, if operating surpluses continue or grow, and if enrollment growth meets its projections. MAY 23,

4 Enterprise Profile Industry risk Industry risk addresses the higher education sector's overall cyclicality and competitive risk and growth by applying various stress scenarios and evaluating barriers to entry, levels and trends of profitability, substitution risk, and growth trends observed in the industry. We believe the higher education sector represents a low credit risk when compared with other industries and sectors. Economic fundamentals In our view, the college has good geographic diversity, with 82% of students attending from outside Pennsylvania. As such, the U.S. GDP per capita anchors our assessment of Lafayette's economic fundamentals. Market position and demand Total full-time equivalent (FTE) enrollment has been fairly constant historically. Management expects fall 2017 enrollment to be , which is higher than previous years and supports management's plan of growing enrollment to 2,900 by Freshmen applications were 8,123 in fall 2016, up 8.8% from the fall 2015 applicant pool. In our opinion, the continued healthy demand and solid selectivity support the rating. Matriculation, in our view, remained consistent with historical levels for fall 2016, and is indicative of the moderately high degree of competition for students among peer institutions. We believe the college's demand metrics allow it solid demand flexibility and do not expect this to change in the next few years. For fall 2016, Lafayette's freshman-to-sophomore retention rate was 94% for fall 2016, lower than fall 2015 at 95% but improved from historical years, and the graduation rate was also healthy at 89%, consistent with the rating category and institutions with a solid academic reputation. Student quality remains high, with a mean SAT score of 1,288, which is well above the national average, and supports the rating. Management indicates tuition, room and board rates, and required fees are in line with those of its competitors, at $63,790 for fiscal Lafayette has a successful fundraising history, in our opinion. The college is in the middle of a $400 million campaign, and through March, 2017, has raised $345.5 million. Annual giving remains strength. In fiscal 2016, Lafayette received $10 million in annual fund contributions. Alumni giving rates are good, in our view, at roughly 29%. We expect available resources to see an increase with the ongoing campaign. Management and governance There have been several changes in management over past several years, but the situation has stabilized more recently. The current president began her term in July She had served in several leadership positions at Middlebury College. The vice-president for finance and administration has been with the college since November Lafayette does not budget for the full amount of depreciation, which we do not view as a best practice. Management is working toward budgeting more of the depreciation expense; it intends to continue to perform internal GAAP reconciliations to the operating budget, which it reports on a semi-accrual basis. We view this action favorably because it would help eliminate structural deficits. Additionally, in 2016, Lafayette began working with PFM's Whiteberch MAY 23,

5 cloud-based strategic financial planning tool that allows it to forecast performance and position, which we view positively. A 35-member board of trustees, which meets at least four times a year, governs the college. The members are elected to serve five-year terms, and could be elect for additional terms but not consecutively. Financial Profile Financial management policies Lafayette has formal policies for endowment, investments, and debt. It operates according to a five-year strategic plan, and is currently in the process of creating a formal reserve and liquidity policy. The financial policies assessment reflects our opinion that, while there may be some areas of risk, the organization's overall financial policies are not likely to impair its ability to pay debt service. Our analysis of financial policies includes a review of the college's financial reporting and disclosure, investment allocation and liquidity, debt profile, contingent liabilities, and legal structure; and a comparison of these policies to those of other colleges. Financial performance After several years of operating deficit on a GAAP basis, Lafayette was able to turn the trend around and generate a full-accrual surplus for fiscal In fiscal 2016, the unrestricted operating income was $1.1 million, better than fiscal 2015's deficit of $2.4 million. Management attributed the surplus to slight growth in enrollment as well as controlled expenses. For fiscal 2017, management is expecting yet another full-accrual surplus, albeit modest compared to fiscal While preliminary, management has budgeted for break-even results for fiscal 2018 on a semi-accrual, non-gaap basis, which is consistent with past fiscal years. Lafayette's endowment spending policy is moderately conservative, in our opinion, at 5%, with a more conservative effective spending rate of 4.7% for fiscal This is slightly higher than the past spending rate of 4.4% for years 2015 and The tuition discount is moderately high, in our view, at 34%, although it is still lower than that of many liberal arts institutions. Despite the increase in financial aid, net tuition revenue remained positive, with continued growth in fiscal 2017 budgeted. We view the growth in net tuition revenue as positive, despite the increased discounting, and expect it to continue. Available resources For fiscal 2016, Lafayette's available resources are solid for the rating category. However, as a result of additional debt, balance-sheet resources drop to a more moderate level for the rating category. Available resources (as measured by expendable resources) were $446 million as of fiscal year-end 2016 (June 30), equal to 224.6% of operating expenses and a weaker 169% of pro forma debt. The college's cash and investments compared with operating expenses and outstanding debt also weakened to 423% and 318%, respectively, as of June 30. We expect that, during the next few years, the college will be able to grow available resources due to ongoing fundraising. The endowment had a market value of approximately $774 million as of fiscal year-end In our view, the endowment asset allocation as of June 30 was moderately conservative, at 50% public equity, 25% absolute return, 10% private equity, and 15% fixed income. As of Dec. 30, 2016, daily liquidity at about $462.9 million compared with MAY 23,

6 current variable-rate exposure of $43 million. Debt and contingent liabilities As of June 30, 2016, Lafayette reported total debt outstanding of $194.7 million; 21% was variable-rate debt, all of which management swapped to fixed-rate. The college has three floating-to-fixed rate swap agreements with one counterparty with a total notional amount of $43.5 million. As of April 2017, Lafayette is no longer required to post collateral; however, it keeps $2 million with BNY Mellon in case of a sudden rate change. In addition to that, Lafayette also has liquidity facilities in the form of SBPAs from U.S. Bank for the series 2003 bonds and by TD Bank for the series 2006 bonds effective Dec. 2, The new SBPAs cover principal and 34 days' interest at a maximum 12% annual rate for the purchase price of bonds not successfully remarketed. The SBPAs cover bonds in the daily, weekly, and monthly interest-rate modes. They are due to expire Dec. 2, 2019 for the 2003 bonds and Dec. 2, 2021 for the 2006 bonds, at which time we will remove the short-term component of the ratings unless extended or terminated beforehand. The college is also adding a 2010A SBPA with TD Bank. The SBPA providers' obligations to purchase tendered bonds will automatically terminate should some events of default set forth in the respective SBPAs occur. These events (which we consider consistent with our published criteria) include, but are not limited to, a lowering of the rating on the bonds below 'BBB-'. Total pro forma debt for Lafayette is $264 million. We understand the college plans to use the proceeds of the bonds for financing an integrated science building for academic programs in the STEM curriculum and for the advance refunding of its series 2008 bonds. In our opinion, Lafayette has an aggressive debt structure with several bullet maturities and a pro forma debt service burden of 8.15%, which is high, in our opinion, but we believe the college has adequate unrestricted resources to meet these obligations. Lafayette College, PA -- Selected Financial Statistics Fiscal year ended June 30 Medians: Private colleges and universities Enrollment and demand 'AA' 2015 'A' 2015 Headcount 2,550 2,533 2,503 2,489 2,488 MNR MNR Full-time equivalent 2,520 2,505 2,471 2,452 2,456 3,761 3,443 Freshman acceptance rate (%) Freshman matriculation rate (%) MNR MNR Undergraduates as a % of total enrollment (%) Freshman retention (%) Graduation rates (five years) (%) N.A. N.A. N.A MNR MNR Income statement Adjusted operating revenue ($000s) N.A. 199, , , ,665 MNR MNR Adjusted operating expense ($000s) N.A. 198, , , ,100 MNR MNR Net operating income ($000s) N.A. 1,094 (2,480) (1,754) (2,435) MNR MNR Net operating margin (%) N.A (1.29) (0.94) (1.35) Change in unrestricted net assets ($000s) N.A. (11,709) (2,948) 19,524 22,556 MNR MNR Tuition discount (%) N.A MAY 23,

7 Lafayette College, PA -- Selected Financial Statistics (cont.) Fiscal year ended June 30 Medians: Private colleges and universities 'AA' 2015 'A' 2015 Tuition dependence (%) N.A MNR MNR Student dependence (%) N.A Healthcare operations dependence (%) N.A. N.A. N.A. N.A. N.A. MNR MNR Research dependence (%) N.A MNR MNR Endowment and investment income dependence (%) Debt N.A MNR MNR Outstanding debt ($000s) N.A. 194, , , , ,895 98,975 Proposed debt ($000s) N.A. 134,775 N.A. N.A. N.A. MNR MNR Total pro forma debt ($000s) N.A. 264,046 N.A. N.A. N.A. MNR MNR Pro forma MADS N.A. 16,202 N.A. N.A. N.A. MNR MNR Current debt service burden (%) N.A MNR MNR Current MADS burden (%) N.A N.A Pro forma MADS burden (%) N.A N.A. N.A. N.A. MNR MNR Financial resource ratios Endowment market value ($000s) N.A. 774, , , ,469 1,166, ,203 Cash and investments ($000s) N.A. 841, , , ,835 MNR MNR Unrestricted net assets ($000s) N.A. 251, , , ,164 MNR MNR Expendable resources ($000s) N.A. 446, , , ,039 MNR MNR Cash and investments to operations (%) N.A Cash and investments to debt (%) N.A Cash and investments to pro forma debt (%) N.A N.A. N.A. N.A. MNR MNR Expendable resources to operations (%) N.A Expendable resources to debt (%) N.A Expendable resources to pro forma debt (%) N.A N.A. N.A. N.A. MNR MNR Average age of plant (years) N.A N.A.--Not available. MNR--Median not reported. Ratings Detail (As Of May 23, 2017) Northampton Cnty Gen Purp Auth, Pennsylvania Lafayette Coll, Pennsylvania Northampton Cnty Gen Purp Auth (Lafayette Coll) RMKTD 11/14/16 variable rate rev bnds (Lafayette Coll) Long Term Rating A+/A-1/Stable Downgraded Series 2008 & 2010 B Long Term Rating A+/Stable Downgraded Series 2010 A Long Term Rating A+/A-1/Stable Downgraded MAY 23,

8 MAY 23,

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