Illinois Finance Authority -- Moody's assigns Baa3 to Lake Forest College's (IL) $16.07 million Series 2012 A&B Revenue Bonds; Outlook is negative

Moody's Rating

Issue: Revenue Bonds, Lake Forest College, Series 2012A; Rating: Baa3; Sale Amount: $15,840,000; Expected Sale Date: 7-4-2012; Rating Description: Revenue: 501c3 Unsecured General Obligation

Issue: Taxable Revenue Bonds, Lake Forest College, Series 2012B; Rating: Baa3; Sale Amount: $230,000; Expected Sale Date: 7-4-2012; Rating Description: Revenue: 501c3 Unsecured General Obligation

Opinion

Moody's has assigned a Baa3 underlying rating to Lake Forest College's (IL) $16.07 million Revenue Bonds Series 2012A and Taxable Revenue Bonds Series 2012B. The rating outlook is negative.

SUMMARY RATING RATIONALE

The Baa3 rating reflects Lake Forest College's stable market position as a fairly selective liberal arts college located 30 miles north of Chicago, comparatively strong revenue diversity supported by good gift support, adequate balance sheet size for rating category, and sufficient liquidity coverage of variable rate debt. The rating also incorporates the college's thin financial resource coverage of debt, weak operating performance, elevated endowment draw, and competitive student market environment evidenced by a low net tuition per student relative to other small Baa-rated colleges.

The negative outlook is based on the risks associated with the new housing project that will add 170 beds, particularly if the college is not able to meet its enrollment growth plans; continued weak operating performance projected for FY 2012 per Moody's calculations; and potential for reduced headroom on financial covenants in the college's loan agreements and the Series 2008 letter of credit reimbursement agreement given this additional debt issuance.

CHALLENGES:

*Low expendable financial resource coverage of debt and operations. Expendable financial resources of $9.5 million in FY 2011 provided a narrow 0.22 times coverage of pro-forma debt, well below the FY 2010 median for Baa-rated small institutions of 0.77 times, and 0.20 times coverage of operations.

*Poor operating performance, with a limited 6.6% operating cash flow margin in FY 2011, provided 1.6 times coverage of debt service in FY 2011 and a projected 1.0 times coverage of pro-forma maximum annual debt service ($3.03 million in FY 2028). Operating performance in FY 2012 is expected to be slightly weaker than in FY 2011.

*Slow resource growth relative to peers due to the college's elevated endowment draw to cover operations and debt service as well as significant capital investments. Expendable financial resources of $9.5 million in FY 2011 were only 38% of the $25 million pre-recession level value as of FY 2008. Management plans to return to a 5% endowment draw in approximately three years.

*High tuition discount rate of 54% in fall 2011 points to the competitive student market in this area. Net tuition per student grew 2.7% in fall 2011, but fell 6% in fall 2010 due to an increase in scholarships.

*Construction and lease-up risks associated with constructing a new dormitory facility scheduled to open for fall 2013, though we note that there is a guaranteed maximum price and liquidated damages agreement.

STRENGTHS:

*Stable market position as a liberal arts college located in Lake Forest, a suburb north of Chicago. Lake Forest had 1,491 full-time equivalent students (FTE) as of fall 2011 and a 54% selectivity, stronger than the FY 2010 median for small Baa-rated institutions of 66%. The college plans to increase FTE enrollment to 1700 by fall 2015. As of June 21, the college had 430 enrolled freshmen (versus a goal of 425 students), though we note the potential for summer melt.

*Unrestricted financial resources will grow in FY 2012 since four donors have agreed to reclassify $10 million of permanently restricted funds to unrestricted, particularly important for Lake Forest given that unrestricted resources were negative $10.5 million in FY 2011.

*Healthy gift support, which represented 12.8% of total operating revenue in FY 2011, helps diversity revenue sources. Tuition and auxiliaries are the largest source of revenue, at 72% of total operating revenue in FY 2011, though less dependent than peers given a FY 2010 median of 82% for small Baa-rated institutions.

*Monthly liquidity of $11.4 million in FY 2011, though low for the rating category, provided adequate 1.9 times coverage of $6 million of Series 2008 variable rate debt in FY 2011. Monthly liquidity coverage of expenses was weaker at 95 days cash on hand in FY 2011.

*Gross revenues from the new housing facility to be constructed with Series 2012A&B bonds will cover debt service payments per the college's projections.

*No future debt plans in the near-term.

Outlook

The negative rating outlook is based on our expectation that the college will continue to experience negative operating margins, particularly if the housing project is not completed on schedule and the college must use its own resources to pay debt service, continued elevated endowment draws that limit financial resource growth, pressure on student quality and demand metrics if application growth does not keep pace with newly admitted students, and operational risks associated with building a new housing facility.

WHAT COULD CHANGE THE RATING UP

Substantial increase in financial resources to provide a stronger cushion for debt and operations; stable enrollment and tuition revenue growth; improved operating performance to provide better debt service coverage; return to a percentage-based, lower endowment draw.

WHAT COULD CHANGE THE RATING DOWN

Decline in financial resources or liquidity levels; pressure on student demand metrics or net tuition per student growth; failure to meet student enrollment targets; continued weak operating performance, including elevated endowment draw or expense growth outpacing revenue growth; decline in gift revenue

METHODOLOGY

The principal methodology used in this rating was U.S. Not-for-Profit Private and Public Higher Education published in August 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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Emily Schwarz Analyst Public Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Eva BogatyAsst Vice President - Analyst Public Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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