Standard & Poor's Ratings Services said it has lowered its long-term rating to BB-plus from BBB-minus on the Educational Building Authority of the City of Marion, Ala.'s series 2010 bonds issued for Judson College.
"The rating reflects our view of the college's large fiscal 2012 operating deficit, which is likely a one-time departure from its historically balanced operations on a full accrual basis, but leaves Judson susceptible to increased credit risk when combined with already weak financial resources, a high maximum annual debt service burden, above-average endowment spend rate, and high debt level relative to size and budget," said Standard & Poor's credit analyst Avani Parikh. "In addition, for the past two years, the college has increased its reliance on its lines of credit to support working capital needs, which we believe limits cash flow flexibility," said Parkih.
These weaknesses are currently balanced by the college's growing enrollment trends, record of historically balanced operating performance, consistently positive net tuition revenue growth, and continued compliance with its covenant to maintain endowment to debt coverage of more than 1.25x.
In addition, the college receives strong financial support from the Alabama Baptist State Convention, which is an important credit factor that supports the rating. The convention's contribution, which has typically exceeded $1 million, fell to $962,000 in fiscal 2012 and $915,000 in fiscal 2011. Management attributes the decreased amount partly to an accounting adjustment as well as the economic downturn and expects the fiscal 2013 contribution to be similar to that of fiscal 2012. In Standard & Poor's view, a trend of lower contributions could present a credit risk.
The stable outlook reflects Standard & Poor's view that over the two-year outlook period, the Alabama Baptist State Convention will likely continue to provide significant support to the college and student demand and enrollment will remain stable or increase. Standard & Poor's also expects the college will likely return to balanced operations on a full accrual basis in fiscal 2013 due to management's focus on expense controls and year-to-date performance.
