NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB' rating on approximately $83.4 million private college revenue refunding bonds, series 2014 issued by the Iowa Higher Education Loan Authority on behalf of Wartburg College (Wartburg or the college).
The fixed rate series 2014 bonds (the bonds) are expected to sell via negotiation the week of July 28, 2014. Proceeds of the bonds will be used to current refund all of the outstanding series 2005A and series 2005B bonds, and to pay costs of issuance.
At the same time, Fitch affirms the rating on the outstanding series 2005A bonds.
The Rating Outlook is Stable.
The series 2014 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, including the wellness center which was the prime security for the series 2005B bonds. Additionally, the bonds are supported by a debt service reserve fund equal to maximum annual debt service (MADS).
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 liquidity cushion; and no new debt plans alleviate some concern over the college's high debt burden.
DECLINING ENROLLMENT TREND: Wartburg has experienced two consecutive years of a reduction in full-time equivalent (FTE) counts. Management has ramped up recruitment efforts which reflect an increase in year-over-year applications, admits and deposits for fall 2014 to date (at July 1, 2014).
FINANCIAL FLEXIBILITY LIMITED: Wartburg is dependent on a high level of student fees to support operations. This critical reliance on student related revenue is exacerbated by a nearly 50% discount rate.
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 in operating margins driving resource growth may yield positive rating momentum.
Wartburg College, 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 increased 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.
The audited financial statements for the fiscal year ending May 31, 2014 are not yet completed. Previously Fitch noted an expectation of Wartburg generating a break-even operating margin by fiscal 2014 on a full accrual basis, as calculated by Fitch to include the endowment draw and depreciation expense, but exclude realized and unrealized gains. According to management, operating results are expected to remain positive on a cash-flow basis; however, break-even results are not expected for fiscal 2014 on a full accrual basis. Although management expects to achieve their targets for the year, Fitch is unable to assess the progress as Wartburg does not typically produce interim statements. Operational budget information provided to Fitch at fiscal year-end 2014 is balanced on a budgetary basis.
Fitch remains concerned that there is a downward trend in both FTE and headcount but expects to see enrollment stabilization in the near term, the lack of which could affect the ratings level in the future. Preliminary budgeted enrollment as of the May board meeting assumed flat enrollment in fall 2014, which was 1,680 FTE students in the fall of 2013. Current, projected enrollment for new students is anticipated to be similar or better for the fall of 2014 according to management. The fiscal 2015 budget was built on 510 incoming students, and the college is on track for about 520 incoming students.
The college's admissions profile is also ahead of last year. At this point in time last year, the college received 2,373 applications, admitted 1,794 students, and received 475 net deposits versus this year. The college has received 2,413 applications, admitted 1,862 students and received 494 net deposits to date. Wartburg is also running .3% lower in summer melt this year than last.
Negative enrollment growth in fall of 2014 would most likely pressure the rating, however, Wartburg's ability to consistently improve margins despite enrollment loss is viewed favorably. Positively, the college typically updates the operating budget in the fall, after actual fall enrollment is certain. Management believes they have built in enough flexibility in the budget process to handle any slight variations in enrollment and financial aid.
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 fiscal 2013 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, compared to other 'BB' category credits rated by Fitch.
According to management, student financial aid awards are expected to be similar to what was budgeted in fall 2014; however, a flat to slightly higher discounting rate than the prior year is expected. Favorably, the college focuses on growth in the average net tuition per student which is expected to grow in fiscal 2015, along with overall net tuition.
Fitch notes that 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 alternative investment allocation for Wartburg is approximately 23%, essentially the same as the previous year. Management reported that the endowment returned 11% fiscal year-to-date, increasing the pooled endowment market value as of May 31, 2014 to $56.6 million (unaudited), compared to $52.4 million over the prior year.
Wartburg's reliance upon enrollment-related revenues necessitates maintenance of the liquidity cushion at or above current levels to manage potential demand volatility. As of May 2014, the College has raised $44 mm, or 60% of its $75 million goal under its comprehensive capital campaign, and intends to enter the public phase of the campaign in Fall of 2014. Fitch will continue to monitor the college's progress towards this goal.
After the refunding, Wartburg's long-term debt of $83.6 million yields a high pro-forma MADS burden of 12.4%. Offsetting the debt burden magnitude to some degree is the college's ability to adequately cover debt service from operations. Coverage of pro forma MADS is 1.19x based on fiscal 2013 unrestricted operating revenues, as calculated by Fitch. The series 2014 debt is structured with ascending pro-forma MADS occurring in fiscal 2037. Pro-forma average annual debt service (AADS) coverage based on fiscal 2013 operations is stronger at 1.32x. The college's debt burden is expected to decline over time due to normal amortization and the lack of any new debt plans.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 12, 2014);
--'Fitch Affirms Wartburg College, IA's Revs at 'BB'; Outlook Stable' (March 19, 2014).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria