Fitch Rates Claremont Graduate University's (California) Revs 'A'

2008-07-31 23:40:02 -

- Fitch Ratings assigns an 'A' rating to $15,000,000 California Educational Facilities Authority revenue bonds 2008 series A issued on behalf of Claremont Graduate University (CGU). The 2008 series A bonds (the bonds) are scheduled to price via negotiated sale on or about August 7th and will fund several capital plan projects; refinance an outstanding loan; fund capitalized interest through

March 2009; and pay various costs of issuance. At the same time, Fitch assigns an 'A' rating to $3,965,000 of outstanding series 1999A revenue bonds and $36,000,000 of outstanding series 2007A revenue bonds previously issued by CEFA on behalf of CGU. Revenue bonds represent an unsecured, general obligation of CGU. The Rating Outlook is Stable.

The 'A' rating reflects solid balance sheet liquidity supported by a balanced investment mix and reasonable endowment spending policy; stable enrollment fostered by CGU's market niche as a private, independent graduate university, and its unique focus on interdisciplinary academic programs and research; a renewed focus on fundraising following several years of relatively limited, large-scale institutional development activities; and proactive investments being made by CGU's fairly new management team in both programs and facilities to strengthen the university's competitive position.

Primary credit concerns include lackluster operating performance which has been generally no better than break-even over the past five fiscal years; high, though manageable, levels of financial leverage; weakened investment performance as a result of recent financial market turmoil; and management turnover which has resulted in a new, but experienced, leadership team. While CGU has indicated additional debt may be issued over the next three to five years to fund additional campus improvements, Fitch expects any such issuance to be supported by stabilized operating performance and/or growth in resources available for its repayment.

CGU served approximately 1,243 full-time equivalent (FTE's) students during fiscal 2008, offering 40 degree and certificate programs in approximately 24 fields of study. With tuition and fees representing a fairly high (72.9%) of operating revenues, CGU must manage its enrollment to prevent a material weakening in annual financial performance. Since fall 2003, FTE's have increased by an average annual rate of approximately 1.3%.

CGU's second largest source of revenue is investment income (13.5%) generated principally from a 5% spending rate, based upon a twelve quarter market value average, applied to its pooled investment fund (the fund). As of June 30, 2007, CGU's pooled investments totaled approximately $195.5 million. Since that time, financial market fluctuations have caused a moderate decline in the value of the fund. Importantly, Fitch notes the decline is in-line with the experience of other colleges and universities with a similar heavy weighting toward equity (approximately 60%). Moreover, pooled investments have a long-term focus and can be expected to fluctuate in response to various market cycles.

CGU's operating margin in fiscal 2007 equaled a negative 2.1% down from a positive .4% in fiscal 2006. Weakening financial performance in fiscal 2007 reflected several one-time expenditures, including costs associated with the opening of an academic support center; renovations to various auxiliaries; and the acquisition of a property near campus. Fiscal 2008 performance is expected to improve slightly, with a break-even level of performance anticipated for fiscal 2009. CGU's below 'A' median level operating margin is counterbalanced by its strong liquidity. Available funds, which is measured as cash and investments which are not permanently restricted, equaled approximately $110.4 million in fiscal 2007, representing approximately 228.3% of operating expenses and 195.5% of pro-forma debt. Fitch's median of available funds to operating expenses for an 'A' category private college is 83.1%. The median of available funds to debt is 90.0%. CGU has fairly limited exposure to less liquid alternative asset classes.

Over the past several fiscal years, CGU's senior management team has experienced turnover as the president; senior vice president for finance and administration; the provost; and vice president for development are fairly new. While this poses some risk, each new member of the team is experienced in their respective field and brings expertise in strategic and facilities master planning. Comprehensive fundraising has been one of the primary areas CGU plans to address over the near term as it prepares for its first capital plan in several years. While as a graduate institution it is more difficult to fundraise from alumni, CGU is developing an infrastructure to energize this base as well as further the success it has had in securing gifts from private foundations. In Fitch's view, significant upside potential exists for fundraising at CGU.

Located in Claremont, California, CGU is one of seven educational institutions comprising the Claremont Colleges consortium. It is one of only two consortium members devoted exclusively to graduate education.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings, New York
Douglas J. Kilcommons, 212-908-0740
Colin Walsh, 212-908-0767
Sandro Scenga, 212-908-0278 (Media Relations)