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Fitch Assigns 'AA-' IDR to SMU; Affirms Revs at 'AA-'

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Fitch Assigns 'AA-' IDR to SMU; Affirms Revs at 'AA-'

Postby AfricanMustang » Tue Sep 29, 2020 10:42 am

ANALYTICAL CONCLUSION
The 'AA-' rating and Stable Outlook reflect SMU's strong 'aa' Revenue Defensibility assessment in relation to the 'aa' Operating Risk, and Financial Risk profile assessments. Revenue defensibility is supported by competitive admissions from a multi-state region and very strong student quality. The 'aa' Operating Risk assessment reflects historically positive cash-flow margins with likely future debt plans that appear manageable at this time. Fiscal 2020 results are weaker than usual due to expenses related to the coronavirus pandemic, and financial pressure could continue into fiscal 2021, primarily related to athletics and housing/dining operations. To date, the fall 2020 semester has opened with increased enrollment, most students living on campus, and football currently playing. The strong 'aa' Financial Profile assessment reflects adequate balance sheet strength relative to debt for the assessment. Fitch views SMU as having both budget flexibility and liquid reserves to manage through potential fiscal 2021 coronavirus revenue pressures. Debt leverage remains consistent with the rating category through Fitch's downside scenario analysis.

Coronavirus Impact
The ongoing coronavirus pandemic and related government-led containment measures create an uncertain environment for the U.S. Public Finance higher education sector. Fitch's forward-looking analysis is informed by management's expectations coupled with Fitch's common set of baseline and downside macroeconomic scenarios. Fitch's scenarios will evolve as needed during this dynamic period. Fitch's current baseline scenario includes a sharp economic contraction in 2Q20 with a sequential recovery starting from the third quarter of 2020.

For the higher education sector, the baseline case assumes the closure of most residential campuses for a three- to four-month period, followed by gradual recovery through the next academic year (fiscal 2021). These assumptions are consistent with SMU's operations to date. SMU went fully online through the spring 2020 semester, with room, board and parking fee reimbursements or credits made to students. The first summer session was fully on-line, and the second session had an on-campus option. For fall 2020, SMU reopened campus with traditional student enrollment slightly stronger than fall 2019 levels. Academic offerings are a mix of in-person, on-line and hybrid academic classes, with an emphasis on in-person instruction whenever possible. Housing facilities have reopened, with only modest reductions in occupancy for social distancing purposes and reserving quarantine space if needed. Football is scheduled and underway for the fall semester with restricted numbers of spectators. Management reports Covid-19 testing is optional but free, and offered widely on campus.

Fitch's downside scenario assumes a slower economic recovery and prolonged or recurring coronavirus-related disruptions, such as curtailed auxiliary activity and extended campus closures into the 2020-2021 academic year (fiscal 2021), resulting in more pronounced revenue pressures. To date SMU reports a balanced operating budget that can be adjusted for various contingencies; Fitch understands results could change with re-closures due to a coronavirus surge on campuses.

The rating sensitivities address potential rating implications under a downside stress scenario. This assumes a slower economic recovery and prolonged or recurring pandemic-induced disruptions lasting into fiscal 2021, including tuition, auxiliary, athletic and other related revenue pressures.

Revenue Defensibility: 'aa'
Strong Demand and Stable Enrollment

SMU's strong demand, high student quality and academic niche support a 'aa' assessment. Revenue is fairly diverse for a private university, with about 63% of fiscal 2020 operating revenue generated from net student revenues, and the balance primarily from endowment draws and gifts.

Operating Risk: 'aa'
Historically Solid Cash Flow Margins

SMU's 'aa' Operating Risk assessment reflects a history of expense management and positive financial performance, with cash flow margins typically exceeding 16%. Fiscal 2020 results are a weaker 10.6% due to coronavirus expense pressures, and that pressure may continue into fiscal 2021. While this margin level would normally be more representative of an 'a' assessment, Fitch expects margins to return to historical levels by fiscal 2022 due to strong demand and enrollment, as well as some expense flexibility.

Financial Profile: 'aa'
Strong Financial Profile

SMU's sound debt leverage ratio supports an 'aa' assessment, with resource growth and capital flexibility expected to maintain this profile through a significant stress cycle.

ASYMMETRIC ADDITIONAL RISK CONSIDERATIONS
No negative asymmetrical rating considerations were applied to the rating.

RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:

--Improvement in debt leverage ratios over time, sustained at over 200%, as well as cash-flow margins recovering and remaining in excess of 20%.

Factors that could, individually or collectively, lead to negative rating action/downgrade:
--Deterioration in SMU's cash-flow margins below 10% in fiscal 2022, after expected pandemic effects in fiscal 2021.
--Though not expected, declines in debt leverage ratios sustained below 120%.

BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579].

CREDIT PROFILE
SMU is a private, non-profit university which opened in 1915 and is affiliated with the United Methodist Church. The main campus is located in a residential area of University Park, TX, on 234-acres, which is essentially surrounded by Dallas, TX. SMU's accreditation is in good standing and was renewed in 2011 by SACS for a standard 10 years.

SMU offers a mix of undergraduate, masters and doctoral degrees, as well as two professional programs. Of about 12,383 students enrolled for fall 2019 (10,837 FTE), 37% FTE were graduate students. Prominent graduate programs include education, law, business, engineering and theology. Most undergraduate students attend full-time and live on or near campus. On-line degree program initiatives are all at the graduate level and include engineering, cyber security and business.

SMU has a 42-member board of trustees, all of whom are nominated by the South Central Jurisdiction of the United Methodist Church. Dr. R. Gerald Turner has been SMU's president since 1995. SMU is the home of the George W. Bush presidential center, which opened in 2013. The center has a 249-year ground lease from SMU, with extensions, and operates completely separate from SMU.

REVENUE DEFENSIBILITY
SMU's strong demand and revenue profiles support the 'aa' assessment. SMU has a strong market position in Texas, which has positive demographic projections for high school graduates. Student quality based on standardized test scores is well above the national average and more than half of the freshman class come from outside Texas. Revenue is fairly diverse for a private university, with only 63% of fiscal 2020 operating revenue generated from net student revenues, and the balance primarily from endowment draws and gifts.

Overall enrollment is stable to modestly growing, with headcount of about 12,383 for fall 2020 (10,837 FTE). Both headcount and FTE enrollment are up about 4% from fall 2019, with much of the growth due to an on-line MBA program. For fall 2020, 37% of SMU's 10,837 FTE students are graduates, a mix of on-campus and on-line, and 63% are undergraduates, most of whom enter as freshmen, live on campus and attend full-time. Due to coronavirus, SMU has relaxed its freshman/sophomore residency requirement for the 2020-2021 academic year.
Freshman admissions are fairly selective with an acceptance rate at around 47%-53% (53% in fall 2020), with very strong student quality. The average freshman ACT score consistently exceeds 30 (the national average is about 21). A weak matriculation rate, typically in the low 20%'s, reflects SMU's competitive market but primarily the many academic choices available to its high-quality students. Retention rates are excellent and consistent over time.

Revenue Diversity
SMU has more revenue diversity than most private universities due to a large endowment ($1.6 billion at FYE May 31, 2020, much of which has donor restrictions) and substantial periodic gifts and donations. Fiscal 2020 operating revenues were 63.5% net student income (tuition plus auxiliary); 3.8% gifts; and almost 18% investment return/net income released from restriction.

Tuition and Price Sensitivity
Price sensitivity, as measured by the '5-year Net Tuition Revenues per FTE CAGR' ratio, was 2.0% in fiscal 2020, indicating some revenue flexibility. Unlike some peers, SMU increased tuition, room and board in fall 2020, up about 2.8% overall; in-person students and on-line students are charged the same tuition. However, tuition discounting and a high sticker price ($75,650 in the 2020-2021 academic year, including room and board) could pressure future increases. Management expects to moderate its tuition increases over time.

Fundraising
Fundraising at SMU is robust, with the last campaign, "SMU Unbridled", raising $1.15 billion upon its 2015 conclusion. The university is currently in a quiet phase for the next campaign. Unrestricted giving is healthy. SMU's annual unrestricted gifts/contributions ranged from $23 million - $35 million in recent years ($23 million in fiscal 2020). That does not include restricted gifts/pledges which can be substantial, such as $175 million recognized in fiscal 2020 alone, and $70.7 million in fiscal 2019. These amounts include all or portions of several substantial gifts made public in fiscal 2020, including $50 million for the school of business and $100 million for the graduate school.

OPERATING RISK
SMU's 'aa' Operating Risk assessment reflects a history of expense management and positive financial performance, with cash flow margins typically exceeding 16%. Due to revenue and expense pressures from the coronavirus pandemic, fiscal 2020 margins are weaker at 10.6%. Lower margins are anticipated to continue into fiscal 2021 before rebounding back to historical levels. Due to this expectation, the assessment remains at 'aa'. Ongoing capital projects are largely gift funded, with no new debt issuance expected for around two years.

SMU's fiscal 2020 GAAP operating results were negative $18 million, as adjusted by Fitch, weaker than normal due to pandemic expenses. The resulting fiscal 2020 cash-flow margin was 10.6%, which compared to 17.9% in fiscal 2019 and 16.5% in fiscal 2018. SMU received $4.5 million of CARES Act revenues, of which half was distributed for student aid and the balance partially covered room, board and parking fee reimbursements for the spring 2020 semester. In addition to expense controls, SMU managed the deficiency, which was relatively modest relative to its balance sheet resources, from its ample reserves. While a 10.6% cash-flow margin would normally indicate an 'a' Operating Risk assessment, Fitch considers fiscal 2020 and 2021 operating results unusually low for the university due to the pandemic, and that margins will return to 16% or higher by fiscal 2022 given SMU's strong demand niche and substantial balance sheet. Fitch assumes that, as in fiscal 2020, SMU could again use its reserves in fiscal 2021 to manage unexpected expenses. Solid fall 2020 (fiscal 2021) enrollment at both the undergraduate and graduate levels also supports Fitch's medium-term expectations and supports the 'aa' assessment.

SMU is continuing or completing several large capital projects, many of which are gift funded, and one project has been put on hold. Moving forward are renovations to the graduate school, business school, and the Meadows Arts Center project. A new 80-bed student housing facility opened in fall 2020, funded from internal funds. A $28 million research center is also nearing completion, funded from a mix of gifts and internal funds. Related to some of these projects are a $100 million gift for SMU's graduate school, and a $50 million gift for the business school, both recognized in fiscal 2020. Future capital needs are expected to be funded from a mix of gifts, debt and internal resources.

SMU's average age of plant is quite favorable, reflecting consistent investment in plant and a history of supporting capital gifts over time. Average age of plant was a favorable 11.1 years at the end of fiscal 2020, indicating the university has some capital spending flexibility.

FINANCIAL PROFILE
Outstanding debt at May 31, 2020 was $602 million, excluding $101 million of escrowed bonds and including debt equivalents of $7 million for operating leases. The $602 million total includes three private placement notes, totaling $130 million. The university also has two bank lines of credit totaling $75 million (combined), which have not been drawn. SMU's debt is primarily fixed rate with serial maturities and a declining debt service structure. MADS was $45.5 million in fiscal 2020, representing a manageable 7.6% debt burden; MADS coverage was 1.4x.

SMU offers a defined contribution retirement plan to employees, which by definition is fully funded. It also carries a $42.8 million OPEB liability for health-care benefits provided to eligible retirees through a Medicare supplement product; that plan is closed to new participants. Fitch considers OPEB obligation manageable.

At FYE 2020, SMU's Available Funds, defined as cash and investments less permanently restricted net assets (as defined by Fitch), totaled $1.07 billion, about 174% of operating expenses and 180% of then-outstanding debt. Through a five-year stress scenario, SMU's AF/debt ratio remains consistent with the 'aa' assessment.

https://www.fitchratings.com/research/u ... 29-09-2020
Last edited by AfricanMustang on Tue Sep 29, 2020 3:41 pm, edited 1 time in total.
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Re: Fitch Assigns 'AA-' IDR to SMU; Affirms Revs at 'AA-'

Postby ponyboy » Tue Sep 29, 2020 2:07 pm

I'd say that's a fairly positive analysis. Interesting read.
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Re: Fitch Assigns 'AA-' IDR to SMU; Affirms Revs at 'AA-'

Postby Mexmustang » Mon Oct 12, 2020 3:36 pm

Thank you. As a private institution we have almost no access to SMU's financial condition. The last report I read, almost five years ago was a downgrade. Obviously we cleaned it up.
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