NEW YORK - Fitch Ratings said it has downgraded the rating on $19.5 million education facility revenue bonds issued by the Nebraska Educational Finance Authority on behalf of Midland Lutheran College (MLC, or the college) to BB from BB-plus. The bonds are a general obligation of the college. The rating outlook is stable.
The rating downgrade reflects MLC's significantly weakened credit profile, characterized by a continued decline in demand, sizeable operating deficits, significant endowment draws, and high debt burden. Fitch believes these challenges jeopardize the college's ability to maintain a reasonable level of liquidity to manage its financial obligations. While MLC is taking steps to address enrollment declines and strengthen its financial performance, its ability to achieve significant gains will be difficult in the current economic environment.
The BB rating indicates MLC retains a limited level of liquidity which it can rely upon as it seeks to address its financial and operational difficulties. Should the college fail to stimulate a reversal of current trends over the near term, additional downward rating action may be considered.
MLC's full-time student enrollment trends have been negative since fall 2004, despite its high level of tuition discounting. Its traditional fall 2008 FTE enrollment of 743 is 9.2% below that of fall 2007; however, participation in the college's adult degree completion program (iMpact) program did increase to 40 students. MLC is dependent upon tuition and auxiliary revenue, however, its small size limits operating flexibility. The college has reorganized its student admissions department and new program initiatives are underway to rebuild enrollment. In an effort to reduce costs, the college has begun an academic collaborative effort with nearby Dana College and instituted back office efficiencies.
The college's enrollment declines have negatively affected financial performance, contributing to structural deficits which MLC has attempted to bridge with increased support from its endowment and the use of short-term note obligations. In fiscal 2007, the college's board increased the endowment's spending rate from 6% to 8%. In addition, it authorized additional draws of unrestricted endowment earnings of $1.1 million in fiscal 2007 and $2.7 million in fiscal 2008. MLC's fiscal 2008 endowment payout represented a high 24.9% of total revenues.
MLC achieved a positive operating margin of 2.9% in fiscal 2008 with the additional endowment draw. This draw, in combination with other factors, reduced the college's liquidity, or available funds (unrestricted and temporarily restricted cash and investments). MLC's fiscal 2008 available funds declined 15.5% from fiscal 2007, to $6.1 million, equivalent to 35.2% of unrestricted operating expenses and a meager 23.1% of the college's total outstanding debt for the same period. While the college continued to benefit from a $17.1 million endowment at fiscal year ended 2008, investment performance has not kept pace with the endowment's spending rate, and it is exposed to continuing equity market volatility.
Increasingly negative cash flows from operating activities have engendered a dependence on working capital loans and short-term notes. Due to weak revenue trends, maximum annual debt service (MADS) consumed a high 12.7% of MLC's fiscal 2008 revenues, which increased to a very high 24.5% when payments on the college's additional commitments were included. Fitch does not believe these types of provisional actions to be sustainable.
MLC, founded in 1883, is a private, coeducational liberal arts college, primarily serving undergraduate students. The college is affiliated with the Evangelical Lutheran Church in America and located in Fremont, about 30 miles from Omaha.
