NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'BBB+' rating on approximately $137.2 million of fixed-rate revenue bonds issued by the Pennsylvania Higher Educational Facilities Authority on behalf of La Salle University (La Salle, or the university).
The Rating Outlook is revised to Negative from Stable.
Revenue bonds are an unsecured, general obligation of the university.
KEY RATING DRIVERS
WEAKENED OPERATING PERFORMANCE: The Outlook revision primarily reflects La Salle's recent enrollment declines that contributed to weakened GAAP-based operating performance and debt service coverage. The 'BBB+' rating continues to reflect La Salle's track record of still breakeven-to-positive operations, adequate balance sheet cushion, and sufficient debt service coverage, offset by a high reliance on student-generated revenue and a competitive operating environment.
ENROLLMENT PRESSURES PERSIST: Enrollment fell slightly for a second consecutive year in fall 2013 at the part-time undergraduate and graduate level, while La Salle's tuition discount rate continued to climb, partly reflecting the region's competitive higher education market. Demand appears to be stabilizing, with preliminary fall 2014 enrollment figures in line with the prior year's level.
ADEQUATE BALANCE SHEET CUSHION: La Salle's financial cushion remains modest for the rating level, but balance sheet resources continued to grow in fiscal years 2013 and 2014, and provide the university an adequate cushion relative to operating expenses and outstanding debt.
MANAGEABLE DEBT BURDEN: La Salle's moderately high pro forma debt burden is partially offset by its consistent generation of sound debt service coverage from net operating income, although coverage levels have tightened in line with the compression in the university's operating margin.
CONSERVATIVE CAPITAL STRUCTURE: La Salle's debt burden is additionally mitigated by its entirely fixed-rate debt structure and current lack of major capital or additional borrowing needs.
ENROLLMENT STABILITY DRIVES MARGIN: Due to its significant reliance on student-generated revenue as a driver of operating performance, the rating is sensitive to La Salle's ability to stabilize enrollment and prudently manage a growing discount rate, while at the same time maintaining student and programmatic quality.
ADDED LEVERAGE: While not presently anticipated, the incurrence of additional debt without a commensurate increase in available financial resources could adversely pressure the rating.
La Salle University, founded in 1863 by the Christian Brothers, is located on a 133-acre campus 10 miles north of Center City Philadelphia. In addition to its main campus, the university also has a campus in Newtown, PA (Bucks County), which opened in 1997, and a campus in Plymouth Meeting, PA (Montgomery County), which opened in 2008. La Salle is made up of three schools - Arts and Sciences, Business, and Nursing and Health Sciences, in addition to the College of Professional and Continuing Studies.
OPERATING PERFORMANCE WEAKENING
Similar to many private colleges and universities, La Salle's revenue base is highly concentrated in student-generated tuition, fees and auxiliary receipts, underscoring its need to successfully meet enrollment goals to balance operations. These revenues typically comprise over 83% of La Salle's total unrestricted operating revenue; 86.5% in fiscal 2013. Headcount (6,448) and full-time equivalent enrollment (5,231) declined 2% and 1%, respectively, in fall 2013. This follows a 1.6% and 1.5% decline in fall 2012, although this was partly the result of a planned reduction in freshmen students to improve student quality. Importantly, fall 2013 full-time undergraduate enrollment was flat with the prior year, although tuition discounting continued to increase (41.5% for fall 2013). Most of the decline has been in part-time undergraduate, non-degree and graduate programs, a trend Fitch has observed nationwide.
La Salle's operating margin, on a full accrual basis, has been positive for each of the past five fiscal years (2009-2013), averaging a sound 2.3% over this time period (including endowment distributions). However, the operating margin softened over the past two fiscal years, falling to 0.3%, or effectively breakeven, from 1.9% in fiscal 2012. The fiscal 2012 margin declined from 4.4% in fiscal 2011, although fiscal 2011 benefited from a one-time non-recurring insurance settlement payment. Fitch notes that La Salle's endowment distribution has been conservatively at the lower end of its policy, which is viewed positively and has enabled the university to preserve and build balance sheet resources.
Per unaudited interim data, fiscal 2014 is estimated to have ended just slightly better than fiscal 2013 (on a cash basis), with an operating surplus of about $386,000 compared to a budget of $242,000 in fiscal 2013. Management continues to focus on cost containment and improving net operating income. However, because of La Salle's limited balance sheet liquidity and moderately high debt burden, any further margin deterioration, which may also impact debt service coverage levels, may result in downward rating pressure.
ADEQUATE BALANCE SHEET CUSHION
La Salle's financial cushion remains modest for the rating level, but balance sheet resources continue to grow. Available funds, or cash and investments not permanently restricted, totaled $77.4 million as of June 30, 2013, up from $64.3 million as of June 30, 2012 and up a significant 81% since fiscal-year-end 2009. Available funds covered fiscal 2013 operating expenses ($125.8 million) and outstanding debt ($138.3 million) by 61.5% and 55.9%, respectively. Exposure to alternative, illiquid asset classes remains moderate at approximately 18.7% as of June 30, 2013.
La Salle's ability to grow financial resources while operating performance has weakened is viewed favorably. However, based on its only modest financial cushion, any deterioration to the university's resource base could lead to downward rating pressure Historically, La Salle's stronger operating performance had offset its lighter liquidity levels. Fitch notes that a sustained track record of just breakeven performance coupled with La Salle's existing balance sheet cushion will be more reflective of a 'BBB' rather than a 'BBB+' rating. Conversely, the university's ability to manage its operating margin through stabilizing enrollment and continued expense management, as noted above, while growing balance sheet resources, could lead to stabilization of the Outlook at the current rating level.
HIGH BUT MANAGEABLE DEBT BURDEN
La Salle's debt burden remains moderately high but manageable. Pro forma maximum annual debt service (MADS) occurs in fiscal 2041 at approximately $9.2 million. Average annual debt service (AADS) equates to a slightly lower $8.9 million, indicating the university's mostly level debt service schedule. MADS consumed a moderately high 7.3% of fiscal 2013 unrestricted operating revenues, with AADS consuming a similar 7%.
Partially offsetting the high debt burden is La Salle's consistent ability to generate sound debt service coverage from net operating income. Over the past five fiscal years, current-year debt service coverage ranged between 1.6x (fiscal 2013) and 2.4x (fiscal 2011). However, MADS coverage fell slightly to 1.3x in fiscal 2013 from 1.5x and 1.9x in fiscal years 2012 and 2011, respectively, as La Salle's operating margin tightened. AADS coverage was also 1.3x.
Following refinancing of its variable-rate demand debt in fiscal 2012, La Salle has no variable-rate exposure remaining with all outstanding debt fixed-rate, which Fitch views positively, providing an additional offset to the university's moderately high debt burden. Moreover, no additional debt is planned at this time and new projects including renovation, new construction and expansions are expected to be funded by fundraising and current resources. However, any additional debt incurrence without a commensurate increase in available financial resources or revenues could pressure the rating.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'College and University Rating Criteria' (May 2014);
--'Fitch Affirms La Salle University's (PA) Rev Bonds at 'BBB+'; Outlook Stable' (July 2013).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria