Gwynedd Mercy University, PA Bond Rating Affirmed At 'BBB'

SAN FRANCISCO (S&P Global Ratings) April 15, 2019--S&P Global Ratings affirmed its 'BBB' rating on the Pennsylvania Higher Educational Facilities Authority's debt issued for the Gwynedd Mercy University (GMERCYU) and affirmed its 'BBB' rating on the series 2017PP2 Montgomery County Higher Education and Health Authority's revenue bonds issued on behalf of the Assn. of Independent Colleges and Universities of Pennsylvania Financing Program for GMERCYU. The outlook on all ratings is stable.
As of fiscal year-end 2018, the university had $22.3 million in fixed-rate debt and $18.7 million in weekly variable-rate debt that has an associated letter of credit (LOC). We understand that the university plans to convert its weekly rate 2017V1 bonds, currently rated 'AA-/A-1+' and backed by an LOC, to term mode bonds with no credit enhancement for periods of two to five years. Upon conversion to term mode, the rating on the bonds will be 'BBB'. The bonds will consist of subseries 2017V1A, 2017V1B, and 2017V1C and will comprise two series of $6 million and one series of $6.7 million, with no more than one subseries coming due in any one year, minimizing remarketing risk. Upon conversion to the term mode, the university intends to terminate its current LOC associated with the weekly rate mode. We believe the term conversions are manageable, given that no more than $6.7 million will be subject to tender in any year, and the university maintains access to liquid resources in excess of $27.3 million to cover any failed remarketing. The remarketed bonds will be secured solely by the pledged revenue of the university, which we consider equivalent to a general obligation of the university.
"The rating reflects our view of GMERCYU's strong enterprise profile and adequate financial profile," said S&P Global Ratings credit analyst Phillip Pena.
We assessed GMERCYU's enterprise profile as strong, characterized by growing full-time-equivalent enrollment over the past five years and a generally improving demand profile, though we expect growth to flatten over time, with good growth in applications and an improving selectivity rate. We assessed the financial profile as adequate, characterized by improved operations with a full-accrual surplus recorded for fiscal 2018, as well as sufficient balance sheet resources for the rating category. Despite these strengths, we recognize that GMERCYU has a relatively high maximum annual debt service burden that includes operating leases. Combined, we believe these credit factors lead to a 'bbb' indicative stand-alone credit profile and 'BBB' long-term rating.
The stable outlook reflects our expectation that, over the two-year outlook period, GMERCYU's enrollment will continue to grow, though at a slower pace than in the recent past. We also expect the university will continue to improve its demand metrics, and will generate at least break-even operating results, while maintaining or growing available resources as measured by expendable resources. We also expect that the university will not issue any additional debt without commensurate growth in available resources.
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