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Fitch Affirms Southern Methodist University, TX at 'AA-'

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Fitch Affirms Southern Methodist University, TX at 'AA-'

Postby AfricanMustang » Mon Nov 22, 2021 6:53 pm

Fitch Ratings - Chicago - 12 Nov 2021: Fitch Ratings has affirmed the 'AA-' Issuer Default Rating (IDR) on Southern Methodist University (SMU), TX and the 'AA-' rating on various university revenue bonds issued on SMU's behalf by the Southwest Higher Education Authority, Inc., TX.

The Rating Outlook is revised to Positive from Stable.

The bonds are an unsecured general obligation of SMU.

The Positive Outlook revision reflects SMU's steadily improving debt leverage over multiple years, including sizable endowment growth in fiscal 2021 due to strong market returns and gifts. It also reflects solid student demand even with recent pandemic pressures. The university has publicly announced a new $1.5 billion comprehensive campaign, which over time should support debt leverage as SMU has a strong fundraising track record.

The 'AA-' rating and IDR reflect SMU's strong 'aa' Revenue Defensibility assessment in relation to its 'aa' Operating Risk and Financial Risk profile assessments. Revenue defensibility is supported by competitive admissions from a multi-state region, very strong student quality, and a solid demand niche resulting in stable to growing enrollment. Operating revenues are more diverse than most private universities due to gift and investment income, and SMU is typically about 65% reliant on net student revenue.

Historically robust cash-flow margins were somewhat stressed in 2020 due to coronavirus pressures, but rebounded in fiscal 2021, a year with full dorms and most students back on campus. SMU's strong balance sheet supports favorable debt leverage for the rating category. The university's debt leverage remains strong in a stress scenario when including possible additional debt for future housing and parking projects. Fitch views SMU as having both budget flexibility and liquid reserves to manage through any unexpected campus closures due to coronavirus in the 2021/2022 academic year.

Revenue Defensibility: 'aa'

Strong Demand and Stable Enrollment

SMU's strong student demand, selective admissions, high student quality and regional academic niche support the 'aa' assessment. Revenue is fairly diverse for a private university, with about 65% of fiscal 2021 operating revenue generated from net student revenues, and the balance primarily from endowment draws and gifts. SMU's endowment draw formula is sustainable. Fundraising at SMU is robust, with the last campaign concluding in 2015 and raising $1.15 billion. A new $1.5 billion campaign, "SMU Ignited", was announced in October 2021.

Overall enrollment is stable to growing, with a record headcount of 12,383 for fall 2020 (12,373 FTE), up 4.6% despite coronavirus pressures. Fall 2021 headcount is level with fall 2020. Modest enrollment growth in recent years is largely due to a new online MBA program.

Operating Risk: 'aa'

Historically Solid Cash Flow Margins

SMU's 'aa' Operating Risk assessment reflects a history of strong expense management and positive financial performance, with cash flow margins typically exceeding 16%. Fiscal 2021 cash-flow margins of 20.7% rebounded from a weaker 10.6% in fiscal 2020 due to coronavirus expense pressures. SMU received about $23 million in stimulus over the three federal funding cycles, of which about $10.5 million is for student aid. Much of the stimulus was recognized as revenue in fiscal 2021.

SMU is continuing or completing several large capital projects, many of which are gift funded. Renovations to the graduate school, business school, and the Meadows Arts Center project are gift funded and are all in process. 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. SMU expects future capital needs to be funded from a mix of gifts, debt and internal resources.

Financial Profile: 'aa'

Strong Financial Profile

SMU debt leverage is consistent with a 'aa' assessment through a significant stress cycle. Most of the stress is related to market value fluctuation of the university's large but relatively aggressive investment portfolio. Outstanding debt at May 31, 2021 was $567 million, which Fitch adjusts to $572 million for operating leases. Outstanding debt includes three private placement notes, totaling $125 million. The university also has two bank lines of credit, $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 is $43.3 million in fiscal 2021, representing a manageable 6.9% debt burden; MADS coverage was 3.0x.

At FYE 2021, SMU's Available Funds (AF, defined as cash and investments less permanently restricted net assets), totaled $1.4 billion, up from $1.075 billion in fiscal 2020 in part due to strong investment returns. AF equaled a very strong 246% of operating expenses and 250% of adjusted debt. Debt leverage remains strong for the rating category through a stress scenario that includes possible future debt issuance.

Asymmetric Additional Risk Considerations
No asymmetrical additional risk considerations were applied to the rating.

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

-- Sustained improvement in debt leverage ratios over time, well over 200%;

-- Cash-flow margins sustained near 20%.

Factors that could, individually or collectively, lead to a negative rating action/downgrade:

-- Sustained deterioration of SMU's cash-flow margins below 10%;

--Though not expected, weakened debt leverage ratios below 140%. SMU's balance sheet is vulnerable to market value fluctuation.

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.

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 is expected to be confirmed in December 2021 by The Southern Association of Colleges and Schools for another standard 10 years.

SMU offers a mix of undergraduate, masters and doctoral degrees, as well as two professional programs. Of about 12,327 students enrolled for fall 2021, 44% (HC) were graduate students. Headcount was up 4.6% in fall 2020, a record level, with much of the growth due to an on-line MBA program. For fall 2021, enrollment is stable. Prominent graduate programs include education, law, business, engineering and theology. Most undergraduate students attend full-time, enter as freshmen, and live on or near campus. Online degree program initiatives are typically 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 independently from SMU.

Coronavirus Impact

SMU went fully online through the spring 2020 semester, with room, board and parking fee reimbursements or credits made to students. The first 2020 summer session was fully on-line, and the second session had an on-campus option. For fall 2020, SMU reopened campus with enrollment up 4.6% over fall 2019 levels, an indication of its strong market position and admissions flexibility. Academic offerings in fall 2020 were a mix of in-person, on-line and hybrid academic classes, with an emphasis on in-person instruction whenever possible; instruction in fall 2021 is largely in-person.

Housing facilities in fall 2020 reopened with only modest reductions in occupancy for social distancing purposes and reserved isolation space; fall 2021 occupancy exceeds 100%. To date in the 2021-2022 academic year, SMU faculty, staff and students may, but are not required to, wear masks.

https://www.fitchratings.com/research/u ... 12-11-2021
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Re: Fitch Affirms Southern Methodist University, TX at 'AA-'

Postby DanFreibergerForHeisman » Tue Nov 23, 2021 8:50 pm

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