NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on approximately $4.9 million of Wallis Higher Education Facilities Corporation tax exempt and taxable education revenue bonds issued on behalf of the University of St. Thomas (UST).
The Rating Outlook is Stable.
The bonds are a general obligation of the university.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'BBB-' rating reflects UST's good demand profile, benefitting from its demographically vibrant location; a track-record of generally positive GAAP-based financial performance; and a balance sheet cushion that has improved in recent years. Counterbalancing factors include a competitive operating environment, which limits UST's ability to grow net tuition revenue, its primary revenue stream, and a very high debt-burden.
GENERALLY FAVORABLE FINANCIAL PERFORMANCE: UST has registered positive GAAP-based financial performance in four out of the past five fiscal years, supported by periodic increases in student charges, a high but well-managed freshmen discounting rate, and careful expense management to-date. Based on interim data, UST may register negative GAAP-based performance in fiscal 2014; however, Fitch gains some comfort from the fact that a positive operating cash flow is still being anticipated.
STEADY ENROLLMENT TRENDS: Fall 2013 total headcount enrollment of 3,589 is 3.3% below fall 2012 but well within historical levels. A majority of the year-over-year decline in fall 2013 occurred within the Masters of Education (MED) programs, which appears to be experiencing a slowdown in demand following considerable growth in recent years. Fitch notes that enrollment declines within the MED programs appear to be relatively manageable from a budgetary perspective.
MANAGEABLE DEBT BURDEN: UST regularly generates a sufficient level of net income from operations to cover annual debt service and there are no additional debt plans. . The manageability of UST's debt burden is contingent on the successful refinancing of a real estate loan (the loan) coming due in fall 2015. Fitch notes positively that management has successfully refinanced the same loan in the past.
PRESSURED OPERATING PERFORMANCE: As UST's financial cushion relative to operating expenses remains light for the 'BBB' rating category, operational pressure could adversely impact the university's financial condition. An inability to appropriately adjust expenses in line with commensurate revenue growth, or lack thereof, would be viewed unfavorably.
UNSUCCESSFUL DEBT RESTRUCTURING: Inability to successfully manage the expiration of the loan obligation could strain the university's unencumbered financial resources, resulting in negative rating pressure.
Founded in 1947 by the Basilian Fathers, UST is the only Catholic Liberal Arts University in Houston and is located in Houston's Museum District, near the Galleria and Texas Medical Center. The university's accreditation by the Southern Association of Colleges and Universities (SACS) was most recently reaffirmed in 2005 for a ten-year term.
GENERALLY FAVORABLE FINANCIAL PERFORMANCE
In fiscal 2013 UST had a negative 3.5% operating margin, but when adjusted for endowment payout recorded a 0.9% margin. Overall, Fitch notes that the university's adjusted margin remains positive, but operating pressure is heightened.
Based on interim financials as of Dec. 31, 2013, Fitch notes that the university may register negative GAAP-based performance in fiscal year-end 2014 due to some softening in annual giving, a decrease in total net tuition and fee revenue, a rise in operating expenses, and management's practice of not budgeting for the full depreciation expense in the operating budget. However, Fitch gains some comfort from the fact that a healthy level of operating cash flow is still being anticipated. UST does budget for a surplus (on a cash basis and consistent with prior years), which is expected to be approximately $2.5 million in fiscal 2014. Despite not budgeting for the full depreciation expense, Fitch notes that the management team regularly monitors and addresses the university's most pressing deferred maintenance needs and has demonstrated some success in fundraising to support capital projects.
IMPROVED BALANCE SHEET METRICS
Positive operating performance in tandem with favorable investment returns has driven meaningful growth in the UST's financial resources. As of June 30, 2013, available funds, defined by Fitch as cash and investments not permanently restricted, totaled $22.8 million, which illustrated a fourth consecutive year of improvement ($15.7 million of available funds in fiscal year-end 2012) and covered fiscal 2013 operating expenses ($62 million) by an adequate 36.9% and long-term debt ($34.8 million) by a healthier 65.6%.
STEADY ENROLLMENT TRENDS
Undergraduate enrollment remained relatively stable through the fall 2013 at 1,609, which was slightly down from fall 2012's 1,625 (1% decline). Undergraduate enrollment was largely supported by a freshmen-to-sophomore retention rate of 78%, which is in line with historical levels over the past five years. Further, relative stability in undergraduate enrollment growth benefited from an uptick in the number of new transfer matriculants (183 in fall 2013 relative to 139 in fall 2012).
Graduate enrollment patterns exhibited some decline in fall 2013 as total graduate headcount fell to 1,883 from 1,954 in fall 2012. The decline was primarily located within the university's Masters of Education (MED) program, but Fitch notes that enrollment figures are now in line with historical trends as fall 2011 and fall 2012 had larger than normal enrollment patterns. Overall, Fitch views UST's total enrollment picture as steady, which is viewed favorably, especially as the university is located in a competitive service area in downtown Houston.
MANAGEABLE DEBT BURDEN
UST's maximum annual debt service (MADS) of approximately $12 million, which includes a $9.9 million bullet maturity on the loan, represented a very high 19.1% of fiscal 2013 unrestricted operating revenues (adjusted for full endowment payout). Due to the structure of the university's debt portfolio, Fitch believes average annual debt service (AADS) is a better representation of UST's leverage position. AADS represented a moderate 4.1% of fiscal 2013 unrestricted operating revenues and fiscal 2013 net operating income yielded healthy AADS coverage (2.7x) The university has no plans for debt-financing in the near term.
As indicated in Fitch's prior credit reviews of UST, management plans to refinance the outstanding loan, which matures on September 1, 2015. As implied by its rating level, Fitch believes UST's ability to manage refinancing risk is somewhat limited, although Fitch notes positively that the university has successfully refinanced the same loan in the past. Additional comfort is provided by the university's ability to cover MADS utilizing fiscal year-end 2013 available funds by 1.8x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria'(May 10, 2013);
--'Fitch Affirms University of St. Thomas, TX Revs at 'BBB-', Outlook Stable' (March 1, 2013).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria