Public Finance Authority Series 2017A And 2017B Revenue Bonds For Idaho Osteopathic Assigned #BBB+# Preliminary Rating

Stocks and Financial Services Press Releases Tuesday December 19, 2017 09:22
NEW YORK--19 Dec--S&P Global Ratings

NEW YORK (S&P Global Ratings) Dec. 11, 2017--S&P Global Ratings today assigned its preliminary 'BBB+' ratings to the Public Finance Authority's series 2017A and 2017B taxable educational facilities revenue bonds (see list). It is issuing these bonds on behalf of the Idaho College of Osteopathic Medicine LLC, Idaho College of Osteopathic Medicine project. The outlook on both issues is stable.

The Idaho College of Osteopathic Medicine LLC (ICOM) is a graduate medical school currently under construction in Meridian, Idaho. The project's scope is to construct and operate a 94,000-sq. ft. educational building on the Idaho State University–Meridian Health Science Center campus. ICOM also has an affiliation agreement with Idaho State University (ISU) for 40 years, subject to renewal.

The 'BBB+' preliminary ratings reflect the significant demand for osteopathic education, the relatively simple operations entailed in providing higher education services, highly experienced faculty and staff, and our expectation of a minimum debt service coverage ratio of 1.53x through the debt term.

We believe that the construction process is straightforward and does not pose any significant risk. With more than 40% of construction works complete, the project is ahead of schedule, with all remaining work related to interior work, which mitigates the likelihood of any winter-related delays. Despite the experience of the contractor, straightforward nature of the building process, and construction progress, there is little slack in the construction schedule to support delays, though contingency plans have been made in which ICOM could rent space on the Idaho State campus.

During the operational phase, the project will initially utilize a fixed amount of working capital to pay operational costs as the school grows by annually adding a class until it reaches full capacity in the fall of 2021. After a three-year interest-only period, the bonds will begin to amortize with robust coverage numbers that increase over the debt term. Based on the accreditation history of osteopathic medicine schools, and the experience of faculty and management ICOM has retained, we assume that the college will successfully receive final accreditation, as is the practice, when it graduates its first students in 2022. However, should it fail to ever receive final accreditation, this would likely lead to a default. As discussed below and as evidenced by the investment-grade ratings, we view this to be very unlikely.

The ratings are supported by the following credit strengths:
  • Construction risk is limited given the significant progress to date and the straightforward remaining tasks. With more than 40% of the construction complete and ahead of schedule, we view significant delays as unlikely. Most key exterior work has been completed, and the remaining construction is mainly interior work. This will insulate the project from weather-related delays during the winter months.
  • The debt tenor is short. Based on our assumption that ICOM will make a large prepayment in 2022, the debt tenor is expected to fully amortize in 14 years, by 2031. This short tenor reduces uncertainty for the demand of in-person education as the popularity of remote learning increases.
  • The demand for osteopathic education is high. The project will be the first graduate-level medical educational facility in Idaho, and the student applicant pool is large. Nationwide in 2016, the number of applicants to available D.O. seats was almost 3 to 1. We believe that ICOM will be able to fill 100% of its expected class size.
  • Operations are relatively simple, with no capital expenditure requirements. ICOM will undertake all its own operation and management (O&M) at the facility. The project expects no major capital expenditure will be required over the initial debt term.
  • The project benefits from having highly experienced faculty and staff that have held similar roles at other colleges of osteopathic medicine.
The ratings reflect the following weaknesses:
  • New D.O. schools receive accreditation in phases. The project currently holds a pre-accreditation status with the Commission on Osteopathic College Accreditation (COCA), effectively a regulator for osteopathic schools. The project will be able to obtain full accreditation after graduating its first class in 2022. Any delays in receiving accreditation, however, could damage the reputation of ICOM over the short term, and make it difficult to attract applicants.
  • A delay in increasing class size can materially affect cash flows by more than $10 million (2017 dollars) on a cumulative basis—although there is adequate headroom in the coverage metrics. ICOM has assumed that class sizes will increase by 54 seats by the time it achieves full accreditation in 2022, and will continue to increase by 54 seats every four years until reaching a maximum class size of 324 students in the fall of 2030 (for a total school size of 1296 students in the fall of 2033). Each class size increase is subject to approval from COCA and depends on the operational success of ICOM itself.
  • For the first three years of instruction, the project will be cash-flow negative. To address this, the project has established a capitalized interest account that supports debt-service payments during the approximate three-year interest-only period, and the majority of project costs are paid out of a pre-funded working capital account during this term. It is critical that project management maintain cost to their budgeted levels during this time so that the working capital account does not get depleted faster than expected.

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