Fitch Affirms Wartburg College, IA's Revs at 'BB'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'BB' rating on approximately $47.3 million in outstanding private college facility revenue bonds, series 2005A issued by the Iowa Higher Education Loan Authority on behalf of Wartburg College (Wartburg).

The Rating Outlook is Stable.

SECURITY

Private college facility revenue bonds are a general obligation of the college, secured by a lien on revenues of the college and a mortgage on the core campus.

KEY RATING DRIVERS

FINANCIAL PROFILE IMPROVING: Wartburg's 'BB' rating reflects continuous operating margin improvement, although margins remain negative as calculated by Fitch; relative stability in the unrestricted liquid cushion; and no new debt plans.

DECLINING ENROLLMENT TREND: Wartburg has experienced two consecutive years of a reduction in full-time equivalent (FTE) counts. Management has ramped up recruitment efforts and expects a slightly higher number of incoming students in fall of 2014.

FINANCIAL FLEXIBILITY LIMITED: Wartburg is dependent on student fees to support about 84% of total expenditures. This critical reliance on student related revenue is exacerbated by a nearly 50% discount rate.

RATING SENSITIVITIES

OPERATING PERFORMANCE, RESOURCE DETERIORATION: The rating is sensitive to shifts in enrollment and resultant impacts to operating performance. Wartburg's inability to sustain and build on vastly improved margins over the past four years and stabilize headcount could negatively pressure the rating. Conversely, enrollment growth and continued improvement may yield positive rating momentum.

CREDIT PROFILE

Wartburg, established in 1852 as a liberal arts college of the Evangelical Lutheran church, is located in Waverly, IA and serves predominantly in-state undergraduate students.

OPERATING MARGINS CONTINUE TO IMPROVE

Wartburg's operating margin, calculated by Fitch to exclude any non-operating income except for scheduled annual endowment support, improved in fiscal 2013 but still remained negative (1.8%). Fiscal 2014 is expected to be supported by growth in gifts and contributions, which grew by about $1 million for fiscals 2012 and 2013. Although enrollment declined for the school year 2012-2013, Wartburg's focus on maximizing net yield per student and curbing expense growth assisted in producing margin improvement.

Previously Fitch noted an expectation of Wartburg generating a GAAP basis break-even operating margin by fiscal 2014, which may be possible given the school's consistent year over year improvement in operations. Management expects to achieve their targets for the year, but Fitch is unable to assess the progress as Wartburg does not typically produce interim statements.

LIMITED REVENUE FLEXIBILITY AND HIGH TUITION DISCOUNTING

Wartburg's revenues are predominantly sourced from student related tuition, fees and auxiliary services. These funds comprise a high portion of total revenues and represented about 84% of fiscal 2013's total operating revenues. Wartburg remains dependent upon enrollment growth, and the college's practice of regularly implementing increases in tuition and fees is tempered by a high tuition discounting rate of 49.8% for fiscal 2013.

However, the confluence of high revenue concentration within student fees and charges along with high discounting has not detracted from Wartburg's year over year margin improvement. The college is expected to continue to have a relatively high discount rate compared to other private colleges and universities similarly rated by Fitch.

FISCAL 2013 LIQUIDITY IMPROVED

Balance sheet resources increased in FY13 as a result of investment returns and gifts and contributions. Cash and investments totaled $71.6 million in fiscal 2013, up from about $61 million in the prior year. Consequently, available funds, defined as unrestricted cash and investments increased to $31.8 million in fiscal 2013 from $24 million in fiscal 2012.

Wartburg's available funds offer improvement in cushion and benefitted from a stronger return in FY13. These funds covered 61.8% of operating expenditures and 38.5% of long-term debt. The college's fiscal year-to-date investment returns are in excess of 4%. The alternative investment allocation for Wartburg is approximately 23%, essentially the same as the previous year and the endowment market value as of January 2014 was $55 million. Wartburg's reliance upon enrollment-related revenues necessitates maintenance of the liquidity cushion at or above current levels to manage potential demand volatility.

Wartburg's long-term debt of $83.4 million yields a high maximum annual debt service (MADS) burden of 12.4%, although down slightly from 12.8% in fiscal 2012. Offsetting the debt burden magnitude to some degree is the college's ability to cover debt service from operations. Coverage of MADS increased to 1.2x for fiscal 2013, as calculated by Fitch. The college's debt burden is expected to decline over time due to normal amortization and lack of any new debt plans.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria' (May 2013);

--'U.S. College and University Rating Criteria' (June 2013);

--'Fitch Affirms Wartburg College, IA's Revs at 'BB'; Outlook Stable' (April 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

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=824364

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Contacts

Fitch Ratings
Primary Analyst
James George, +1-212-908-0652
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Nancy Faingar, +1-212-908-0725
Director
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
James George, +1-212-908-0652
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Nancy Faingar, +1-212-908-0725
Director
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com