Fitch Rates Gonzaga University (Washington) Series 2013 Rev Bonds 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'A' rating to the following series of bonds to be issued by the Washington Higher Education Facilities Authority (WHEFA) on behalf of Gonzaga University (Gonzaga, or the university):

--$33 million revenue bonds, series 2013A;

--$20 million taxable revenue bonds, series 2013B.

The series 2013 bonds are expected to sell via negotiation as early as the week of December 9. Bond proceeds will be used to finance construction of the new University Center facility and other capital improvements, fund capitalized interest and a possible interest rate swap termination payment, and pay costs of issuance.

The Rating Outlook is Stable.

SECURITY

Series 2013 bonds, which rank on parity with Gonzaga's approximately $132.4 million of outstanding WHEFA revenue bonds (as of May 31, 2013), are a general obligation secured by unrestricted gross revenues of the university. Additional bondholder protections include a negative pledge restricting any pledge, lien, or other encumbrance on the university's core campus (as defined in the Indenture).

KEY RATING DRIVERS

CONSISTENT OPERATING PERFORMANCE: A track record of solid operating margins, both before and after accounting for endowment distributions, reflects Gonzaga's relative enrollment stability over the past several years; management's conservative financial planning and budgeting practices; and improving fundraising ability. Gonzaga's positive operating history is tempered by a revenue base that is highly concentrated in student-related revenues; a common characteristic of private institutions.

STABLE, YET PRESSURED ENROLLMENT: Gonzaga's enrollment profile has remained relatively stable over the past several years, although, similar to many institutions, it has experienced enrollment declines in certain graduate programs, notably law. While student quality and selectivity remain sound, modest freshmen matriculation and an increasing, yet still manageable, discount rate reflect the university's competitive operating environment.

SOUND FINANCIAL CUSHION: Gonzaga has a sound financial cushion, with available funds providing adequate coverage of operating expenses and pro forma debt. The university's financial resources have grown significantly over the past few years as a result of investment gains, annual operating surpluses, and growing fundraising levels.

MANAGEABLE, BUT MODERATELY HIGH DEBT BURDEN: Post issuance of the series 2013 revenue bonds, pro forma maximum annual debt service (MADS) grows to approximately $15 million, or a moderately high 7.8% of fiscal 2013 unrestricted operating revenues. This debt burden is partly offset by generation of pro forma MADS coverage of nearly 2x, based on net operating income over the past three fiscal years.

RATING SENSITIVITIES

ENROLLMENT STABILITY: Being a tuition-dependent institution, Gonzaga's operating profile is highly sensitive to enrollment levels. An inability to effectively manage periodic shifts or material declines in undergraduate and/or graduate student enrollment could yield negative rating pressure.

ADDITIONAL LEVERAGE: Incurrence of material additional indebtedness without a commensurate increase in available financial resources would pressure the university's financial cushion at the current rating level. Furthermore, the rating assumes ongoing fundraising initiatives will be successful, thereby improving the level of financial resources.

CREDIT PROFILE

Gonzaga was founded in 1887 by the Society of Jesus (the Jesuits) and is affiliated with the Catholic Church through the Jesuit order. It is one of 28 Jesuit colleges and universities in the U.S. Located on a 131-acre campus in Spokane, WA, Gonzaga offers 75 undergraduate programs, 26 master's degree programs, and maintains a campus in Florence, Italy for a student exchange program. It has also operated a host of online master's degree programs for several years, which has helped increase the diversity of its student body and offset declines in certain graduate program enrollment. Gonzaga is accredited by the Northwest Commission on Colleges and Universities and sponsors nine NCAA Division I sports teams for both men and women that participate in the West Coast Conference.

Fall 2013 headcount enrollment totaled 7,605, down slightly from the prior year but nearly flat over a five-year period. Full-time equivalent enrollment (FTE) totaled 7,255, also down slightly from the prior year, but up 1% over a five-year period. Undergraduate enrollment has been flat to slightly growing, offset with declines in graduate headcount and FTEs. Echoing the national trend, law school enrollment declined over the past few years, although only makes up a small portion of total enrollment. To date, Gonzaga has managed the law school enrollment declines effectively, although challenges remain.

Freshmen applications increased year-over-year since fall 2009, partly due to adoption of the Common Application. Selectivity has fluctuated slightly, but remains fairly steady. The fall 2013 acceptance rate was a solid 68%. Matriculation was a fairly low 25.8%, reflecting Gonzaga's competitive operating environment, though the fall 2013 entering freshmen class of 1,238 was about 80 students ahead of plan. Moreover, student quality remains sound, with the university reporting healthy freshmen-to-sophomore retention and six-year graduation rates of 94% and 82%, respectively.

Positive Operations Offset Revenue Concentration

Enrollment stability and conservative budgeting practices on the part of management have supported Gonzaga's track record of solidly positive operating margins. The university generated a 6.6% margin in fiscal 2013 (including endowment spending), exceeding the 3.7% average over the prior five fiscal years (2008-2012). Prior to endowment spending, Gonzaga's margin was a still solid 4.2%. Fitch views Gonzaga's ability to generate breakeven to positive margins before endowment spending favorably as it demonstrates that it is not typically reliant on its endowment to balance operations.

Gonzaga has reasonably controlled costs in recent years; particularly in fiscal 2013 when expenses were held mostly flat with the prior year. This is part attributed to the outsourcing of its bookstore operations, which resulted in a notable drop in auxiliary-related expenses. Total operating expenses grew at a modest 2.9% average annual growth rate (AAGR) since fiscal 2009, compared to operating revenues which grew at a slightly higher 3.9% AAGR. Using conservative assumptions, budgets are prepared with a goal of at least a 3% operating margin. As such, Gonzaga forecasts a positive result for fiscal 2014, though lower than the fiscal 2013 level, with a targeted goal of a 3% GAAP-based operating margin.

Gonzaga's revenue base is heavily concentrated in student-generated revenues (tuition, fees and auxiliaries), making up 85.3% of total unrestricted operating revenues in fiscal 2013. Concentration in student-related revenues, while common for private colleges and universities, is partially offset by Gonzaga's relative enrollment stability over the past several years, with year-over-year growth in net tuition revenue (4.6% AAGR since fiscal 2009). Moreover, the student body is somewhat diverse, with traditional undergraduate and graduate students, and a growing online population.

Sound Financial Cushion

Over the past few years, the combination of operating surpluses and investment gains helped Gonzaga's financial resources rebound from losses incurred during the 2008-2009 financial crisis. Available funds, defined by Fitch as cash and investments not permanently restricted, totaled $166.1 million as of May 31, 2013, up 31% from the prior year and nearly triple the level reported as of May 31, 2009. Available funds covered fiscal 2013 operating expenses ($178.3 million) and pro forma debt (about $191 million) by a solid 93.2% and 87%, respectively. As of Oct. 31, 2013, Gonzaga's pooled endowment returned roughly 8% since May 31, 2013 for an estimated market value of $145.6 million. The pooled endowment represents about 85% of the university's total endowment assets.

The university's investment policy is fairly conservative and includes guidelines for operating funds, with a focus on liquidity, and endowment funds, with a longer-term horizon. Similar to many private institutions, Gonzaga maintains exposure to illiquid, alternative asset classes. These assets make up about a quarter of its portfolio, which Fitch does not view as overly aggressive for an endowment of this size. Adjusting for alternatives, available funds decline to $145.1 million as of May 31, 2013, providing adequate coverage of operations and pro forma debt of 81.4% and 76%, respectively.

Augmenting financial resources and supporting Gonzaga's added leverage and capital plans is a comprehensive fundraising campaign that is currently in the quiet phase; approximately $138.5 million raised to date. Proceeds will support academic programs, financial aid and capital; primarily the University Center project to be funded with the series 2013 bonds. Fitch views management's fundraising initiatives in advance of capital projects favorably and these serve as a partial offset to liquidity ratios that are low for the 'A' rating level.

High, Yet Manageable Debt Burden

Over the past few years, Gonzaga transitioned its debt portfolio into more conservative and traditional structures, refunding previously outstanding auction-rate securities into fixed-rate debt and eliminating all variable-rate exposure. A private placement in fiscal 2013 (series 2012 bonds) added variable-rate exposure again, but at $10.6 million accounts for only 7% of pro forma revenue bond debt.

Gonzaga has two interest rate swaps outstanding for a notional value of $42.9 million. The combined market valuation was negative $6.6 million as of Oct. 31, 2013, although collateral posting is not presently required. The larger of the two swaps ($35.5 million) may be terminated prior to the effective date with proceeds of the series 2013 bonds, leaving $6.9 million outstanding that will effectively part hedge the series 2012 bonds. Based on Gonzaga's sound financial cushion and track record of operating surpluses, Fitch views this modest level of variable-rate and derivative exposure as manageable for the university.

The university's existing debt schedule is fairly front-loaded, with about 95% of existing principal to be retired in 16 years (fiscal 2029). The series 2013A and 2013B bonds have level debt service through fiscal 2029 ($3 million annually), with principal amortization after fiscal 2029. Pro forma MADS on all outstanding debt is fairly level through fiscal 2029 at $15 million, with expected average annual debt service (AADS) equating to about $10.7 million.

Gonzaga's debt burden is moderately high, with MADS consuming 7.8% of fiscal 2013 unrestricted operating revenues ($190.9 million). The AADS burden is lower at a moderate 5.6%. The debt burden is partly offset by consistently positive operating results that produce solid debt service coverage. Fiscal 2013 net operating income of $28.4 million covers MADS by 1.9x, or AADS by a healthy 2.6x, though these levels may decline slightly in fiscal 2014 as operations soften from a strong fiscal 2013 result.

While no concrete plans exist at this time, future debt needs potentially include a multi-disciplinary sciences facility, which management advised is at least three years out, unless a sizable gift is received sooner. Gonzaga has a history of fundraising in advance of capital projects and is expected to continue this practice. Additionally, about $30 million (16%) of debt principal is expected to amortize over the next five years, which is viewed favorably as it provides some headroom for potential future issuance.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria' (May 10, 2013).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=810230

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Colin Walsh, +1 212-908-0767
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Joanne Ferrigan, +1 212-908-0723
Director
or
Committee Chairperson
Maura McGuigan, +1 212-908-0591
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Colin Walsh, +1 212-908-0767
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Joanne Ferrigan, +1 212-908-0723
Director
or
Committee Chairperson
Maura McGuigan, +1 212-908-0591
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com