Debt burden of New Jersey's Stockton University brings downgrade

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Cash flow pressures drove a downgrade of Stockton University as the New Jersey public college prepares to open a satellite Atlantic City campus this September.

Fitch Ratings dropped Stockton bonds to A-minus from A Tuesday citing “an unexpected weakening” of the school’s operating performance for the 2017 fiscal year.

The downgrade applies to $198.8 million of revenue and refunding bonds issued in 2016 through the New Jersey Educational Facilities Authority and $79 million of general obligation lease revenue bonds sold by the Atlantic County Improvement Authority for Stockton’s Atlantic City campus. The outlook was revised to stable from negative.

“Stockton will need to make significant improvements in its operating cash flow to accommodate escalating debt service by 2021,” said Fitch analyst Tipper Austin in Tuesday’s report. “Stockton's debt burden is high and limits its financial flexibility.”

Austin said Stockton’s current $17.1 million of annual debt service equaled “a moderately high” 8% of operating revenues for 2017 and will “escalate quickly” by 2021 to reach $23.7 million in 2023. He said the debt structure enables a few years of cushion to stabilize Atlantic City operations, but weaker cash flow for 2017 has created “heightened risk” because more significant operating improvement will now be required over the remaining lower-debt service period.

Stockton ended the 2017 fiscal year with a mixed liquidity position. The school had available funds of $71.5 million as of June 30 equal to “an adequate” 31% of operating expenses, but “a thin” 20% of debt, according to Fitch. Austin said the pending sale of Stockton Seaview Hotel & Golf Club property should help boost its available funding level in the near-term.

Stockton, which was founded in 1969, enrolled 9,216 students for the fall 2017 semester and wants to reach 10,000 by 2021. Enrollment is up from 8,400 in fall of 2012 and 6,312 in 2000, according to Fitch. Its 1,600-acre main campus is 12 miles from Atlantic City in Galloway Township.

“Although enrollment has appreciably grown year over year, the downgrade reflected operating expense pressures and a mixed liquidity position resulting from capital costs associated with the Academic Quad development on Stockton’s main campus and the new Atlantic City campus construction,” Michael Angulo, Stockton’s vice president for administration and finance, said in a statement. “The university is dedicated to improving expense management and pleased that Fitch revised the university’s outlook from negative to stable, reflecting their expectation that Stockton will materially improve its cash flow over the next two years.“

The Atlantic City Stockton campus is slated to house around 1,000 students and feature a 56,000-square-foot academic building, a 535-bed dorm and 879 parking spaces. The university entered into a public-private partnership with Atlantic City Development Corp. for the development on land that formerly housed Atlantic City High School after encountering legal hurdles with its purchase of the former Showboat Casino Hotel property in December 2014. The campus will be home to the school's Hospitality and Tourism Management Studies program.

Fitch’s rating remains one notch above that of Moody’s Investors Service, which rates the college Baa1 with a negative outlook. Moody’s downgraded Stockton from A3 in 2016 due to increasing leverage while expanding into “an unproven" Atlantic City market.

Atlantic City officials have touted Stockton's move as a positive economic driver that can help the distressed gambling hub diversity beyond casinos. South Jersey Gas is also building its new headquarters in Atlantic City as part of the P3 between Atlantic City Development Corp. and Stockton.

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Higher education bonds Ratings New Jersey Educational Facilities Authority New Jersey