NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'BBB-' rating on approximately $37.7 million of fixed rate revenue refunding bonds issued by Pennsylvania Higher Educational Facilities Authority, on behalf of Holy Family University (HFU).
The Rating Outlook is Stable.
Revenue bonds are secured by unrestricted university revenues. The bonds have no debt service reserve fund.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'BBB-' rating reflects HFU's generally balanced operating results and low but adequate liquidity levels for the rating category. Counterbalancing factors include a revenue base highly concentrated in student revenues, a challenging enrollment environment driven by the competitive landscape in which it operates and a high debt burden, that includes a bullet maturity.
ENROLLMENT PRESSURES PERSIST: HFU's total headcount enrollment in fall 2013 increased due to growth in part-time undergraduate enrollment; however, enrollment fell at both the full-time undergraduate and graduate levels. The university's highly competitive geographical market and internal management changes challenge enrollment in fall 2014. Favorably, HFU is adequately managing the lower enrollment in its fiscal 2015 operating budget. Preliminary fall 2014 enrollment figures exceed the university's budgeted enrollment.
IMPROVED OPERATIONS: Operating margins were essentially break-even in fiscal 2013, after generating a deficit in fiscal 2012 and expected to be positive in fiscal 2014 in accordance with its five year financial plan due to continued cost containment measures. Management continues to rely heavily on institutionally funded financial aid to bring the freshman discount rate to a more competitive level, which accounts for the decrease in net tuition revenues in fiscal 2013 and projected fiscal 2014. Cost containment and new revenue initiatives remain a priority for fiscal 2015.
LEADERSHIP TRANSITION: HFU's new management team is in the second year of the transformation that began in fiscal 2013. A new strategic initiative development process is expected to position HFU for growth over the next year, with a new long-term strategic planning process expected to guide the university for the next five years. The new management team is unproven; however, HFU successfully implemented significant cost efficiencies and reductions in fiscal 2013. These are expected to affect operations favorably in fiscal 2014 and beyond.
MODERATING DEBT BURDEN: Pro forma maximum annual debt service (MADS) debt burden is high based on fiscal 2013 unrestricted operating revenues, after conservatively including the bullet maturity on bank debt due in fiscal 2019, but average annual debt burden is moderate and offset by sound coverage. Favorably, HFU's debt structure is entirely fixed-rate, with no new debt currently planned.
BALANCE SHEET PRESSURES: Further weakening of already low available funds levels relative to operations and debt may pressure the rating.
MARGIN EROSION: Failure to achieve enrollment targets, leading to declining net tuition revenue and significantly weaker operating margins than envisioned under the university's financial plans, may yield negative rating pressures.
HFU is a private, liberal arts institution originally founded in 1954 as a ministry of the Congregation of Sisters of the Holy Family of Nazareth, with its charter as a college approved by the state of Pennsylvania. HFU has three campuses located in Pennsylvania, with the main campus in Northeast Philadelphia, and the other two located in Bucks County (Newtown Township and Bensalem Township). The university offers undergraduate and graduate degrees in nursing and allied health, education, business, arts and sciences, as well as accelerated degree programs, with 81 full-time faculty serving a diverse student body of approximately 2,956 students.
RETURN TO BALANCED OPERATIONS
HFU's generated essentially break-even operations in fiscal 2013, after generating an operating deficit of 2% in fiscal 2012. The deficit was largely due to a reduction in the full-time undergraduate and graduate student population, with operating pressure compounded by HFU's increase in institutionally funded financial aid. The 0.2% operating margin in fiscal 2013 is slightly better than projections presented to Fitch during the last review. Historically, HFU has generated slim but positive margins (averaging 1.1% from 2008-2012), except for the 5.3% surplus realized in 2009, which was the result of both higher enrollment levels in fall 2008 and a higher level of net asset released from restrictions that could be used for operations.
The university completed a significant cost reduction effort in fiscal 2013, reducing operating expenses 2.9% after years of escalation. HFU realized total salary and operating cost savings of approximately $1.7 million in the second half of fiscal 2013, with $2.8 million in annualized savings projected thereafter. A change to the match of faculty and staff pension fund contributions also resulted in a $400k savings in fiscal 2013, with $800,000 of savings on an annualized basis from that time.
Projected fiscal 2014 operating results are positive and slightly better than the plan presented to Fitch last year which is largely attributable to additional cost containment measures. New plan initiatives were delayed until fiscal 2015. As is the case with many private colleges and universities, HFU has a concentrated revenue base, with student-generated revenues accounting for a substantial portion of operating revenues. As a result, management's ability to successfully meet enrollment goals is a key driver in achieving balanced operations.
Fitch will continue to monitor HFU's ability to sustain the operating improvement despite lower enrollment. It is critical that management successfully monitor its budgeted enrollment and improve net tuition revenue in accordance with plan initiatives. Its failure to do so, could negatively affect operations and the current rating.
Total headcount enrollment increased 7.3% to 2,956 in fall 2013 reversing the decline experienced in recent years, largely due to improving part-time undergraduate (including accelerated degree programs). In fall 2013, freshmen applications and deposits declined 8.8% and 6.2%, respectively, as reflected in a slightly lower matriculation rate. Favorably, though, an increase in transfers and accelerated deposits, as well as graduate deposits (largely due to new graduate programs, particularly in school of nursing and business), offset the decline in freshmen deposits in fall 2013. While its fall 2013 graduate headcount was slightly lower than the prior year, management carefully budgeted for the decline and graduate enrollment was slightly better than the fall 2013 budget plan.
According to management, the full-time undergraduate enrollment is still under pressure due to a shrinking demographic market, increased discounting by its competitors, concerns over high student debt and economic pressures. Nonetheless, growth in headcount enrollment is largely attributable to expansion of core programs and efforts launched in early 2013 focused on reorganization of the accelerated degree programs, which target part-time and adult learners.
Fitch will continue to monitor management's enrollment and admissions strategies. Fall 2014 enrollment projections indicate pressure still exists. The ability of the new senior leadership team to execute near-term strategies and enable HFU to stabilize enrollment will be critical to maintaining the current rating. Fitch views a decrease in enrollment as a concern, although mitigated somewhat if HFU can manage the impact to its operating budget.
ADEQUATE BALANCE SHEET RESOURCES
Available funds (Fitch defines as cash and investments not permanently restricted) totaled $21.7 million at fiscal year-end 2013, which is equal to 38.7% of operating expenses and 37.6% of pro forma debt. These ratios are slim but adequate for the 'BBB' category rated by Fitch.
Long-term investments at fiscal year-end 2013 totaled $16 million, with $3.2 million classified as true endowment, $9.8 million as quasi-endowment and the remaining classified as other investment assets. In addition, the university had $5.7 million of unrestricted cash and equivalents, which was available for operating liquidity and planned capital projects. These levels are fairly comparable year over year.
At June 30, 2014, unaudited endowment assets reflect year-over-year returns on the quasi endowment and true endowment funds of 16% and 14%, respectively. The asset allocation is fairly typical, with exposure to fixed income, equity and alternative asset classes. HFU has no endowment spending policy and does not take distributions from the quasi-endowment for operations.
Fitch notes that HFU customarily uses balance sheet assets for capital projects and ongoing deferred maintenance. Fitch recognizes HFU's aging infrastructure is a key concern for management and will continue to monitor HFU's current plans over the next 6 months to develop a deferred maintenance strategy for implementation in fiscal 2016. According to management, there does not appear to be any anticipated draws on balance sheet resources expected in the near term which should enable resources to grow as operations improve.
MANAGEABLE DEBT BURDEN
HFU's debt portfolio is 100% fixed-rate after restructuring its variable rate demand debt and terminating hedges last year. HFU's pro forma MADS debt service totals $7.05 million, including the $3.7 million bullet maturity due in 2019 under a bank facility with PNC Bank. The bank facility was issued to refinance mortgages and the underwater hedge and provide bank line capacity for contingencies. Including the bullet, debt burden consumes a high 15.6% of fiscal 2013 unrestricted operating revenues; however, based on average annual debt service (AADS), debt burden is a more moderate 6.2% and supported by sound AADS coverage of 1.9x.
Fitch believes financial leverage should be tempered over the next several years as debt amortizes given the front loaded nature of the debt structure and the lack of additional debt issuance plans.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 2014);
--'Fitch Rates Holy Family University, PA's Series 2013A Revs 'BBB-'; Outlook Stable' (May 31, 2013).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria