Fitch Rates University of the Sciences, Pennsylvania Series 2015 Rev Refunding Bonds 'A-'

CHICAGO--()--Fitch Ratings assigns an 'A-' rating to Pennsylvania Higher Educational Facilities Authority (PHEFA) revenue refunding bonds series 2015, issued on behalf of University of the Sciences in Philadelphia (USciences, or the university). Additionally, the outstanding series 2012 university bonds are affirmed at 'A-'.

The bonds are expected to sell via negotiation the week of Jan. 19, 2015. Bond proceeds will be used to refund all or part of the outstanding series 2012 parity bonds, and pay costs of issuance.

The Rating Outlook is Stable.

SECURITY

The university is obligated under the loan agreement to make payments which are sufficient to pay debt service when it is due, which pledge Fitch considers equivalent to a general obligation. The series 2015 bonds are issued on parity with outstanding university debt.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: The 'A-' rating reflects sufficient financial flexibility demonstrated through historically positive operating results and solid balance sheet resources. These factors partially compensate for a high maximum annual debt service (MADS) debt burden, softening overall enrollment profile, and weak first-time freshman matriculation rates.

HIGH DEBT BURDEN: The university's MADS burden was a high 9% of fiscal 2014 operating revenues. The level of MADS coverage provided (1.9x in fiscal 2014) only partially offsets the substantial risk posed by the high debt burden.

LIMITED FUTURE DEBT PLANS: USciences' limited additional debt plans provide some comfort regarding the debt burden. However, the university is in the midst of strategic and capital planning, and future capital plans are possible, including housing projects that may include third-party financing.

CONSERVATIVE BUDGETING: USciences' conservative budget process has allowed management to successfully maintain positive operating margins despite recent fluctuations in enrollment and relatively flat net tuition revenues.

RATING SENSITIVITIES

ENROLLMENT STABILIZATION: Failure to stabilize, diversify and over time grow enrollment could create negative rating pressure, particularly if operating margins decline significantly as a result. Endowment draws are expected to be at sustainable levels over time.

ADDITIONAL DEBT OBLIGATIONS: Issuance of significant additional debt or the assumption of new obligations, without a commensurate increase in financial resources available to support repayment, could trigger a negative rating action. Fitch will evaluate new parity debt, or non-recourse financing obligations, as information becomes available.

CREDIT PROFILE

The university was originally founded in 1821 as the Philadelphia College of Pharmacy. After various expansions, USciences was awarded university status in 1998. Presently, USciences offers academic programming in 22 disciplines across four colleges and awards both graduate and undergraduate degrees. The largest program is PharmD, with students entering as freshmen or as transfers. Other new programs include physical therapy, occupational therapy, physician assistant, public health, healthcare and pharmaceutical business, and chemistry and biological sciences.

The university's president, Dr. Helen Giles Gee, resigned effective Dec. 31, 2014, after serving only two and a half years. She was appointed in 2012. Board Chairman Marvin Sampson is acting as interim president, as he did before Dr. Gee's appointment. A presidential search is in progress. Management reported that senior cabinet positions are filled, particularly a new CFO who started in 2013, and that strategic initiatives are continuing. These include development of a master facilities plan, and negotiations with a third-party developer to construct student housing adjacent to campus. Fitch does not view the presidential transition as a concern given the depth of senior staff.

STILL STABILIZING ENROLLMENT

The university's enrollment underpins student-generated revenues, which typically provide 83% of operating revenues. In fall 2014, there were 2,599 full-time equivalent (FTE) students, down from 2,665 the prior year. Of these, about 11% are at the graduate level. Most undergraduate students attend full-time and live on or near campus. The decline of 2.4% FTE enrollment in fall 2014 continued a recent trend, exacerbated by fewer high school students, competition with other pharmacy programs, and less demand for pharmacists than in recent years.

FTE enrollment declined in fall 2010, 2011 and 2012, but increased about 5% in fall 2013. Most of the declines have been in first-time freshmen, primarily in the large pharmacy program. Fitch notes that the matriculation rate for first-time freshmen is weak, indicating significant competition; it was 14.8% in fall 2014, down from a more typical but still slim 20% in previous years. In fall 2014, though, solid increases in undergraduate transfer students and graduate students largely compensated for the freshman pharmacy decline. Matriculation rates for transfer students are significantly stronger (about 46% in fall 2014).

Net tuition revenue increased 1.9% in fiscal 2014 (a year with modest enrollment growth), compared to essentially no growth in 2013, and a 1.7% increase in fiscal 2012. Relatively flat growth in net tuition revenue in recent years is due to financial aid pressures in the highly competitive New Jersey and Pennsylvania markets. Management projects fall 2015 enrollment to be similar to fall 2014, with growth in graduate and transfer students and flat or slight declines in undergraduate enrollment.

USciences continues to diversify its many health sciences degrees and programs, although the undergraduate and graduate pharmacy program continues to have the largest enrollment, nearly half of USciences' total. Management reports that in its region, the program is pressured by declining high school demographics, and competition from both established and relatively new pharmacy schools. Fitch recognizes that pharmacy demand, as with other health science programs, can be cyclical.

POSITIVE OPERATING RESULTS

The university's history of absorbing enrollment shifts while maintaining positive operating performance is supported by conservative budgeting. Annual budgets include a variety of contingency reserves, as well as conservative tuition estimates and enrollment assumptions. Fitch views the budget process as a credit strength given USciences' high reliance on student-generated revenues and high debt burden, and the potentially cyclical nature of pharmacy enrollment.

The 'A-' rating is primarily supported by USciences' healthy financial profile. Over the past eight fiscal years (2007 - 2014), the university's operating margin (including endowment distributions) has been positive. Margins were 4.5% in fiscal 2014, 3.2% in fiscal 2013, and 3.4% in fiscal 2012. The fiscal 2015 budget is balanced, and the university expects another GAAP surplus.

USciences has increased its endowment draw in recent years as it manages enrollment fluctuations and new program development. The endowment was $175 million at June 30, 2014. The draw rate, based on a rolling 12-quarter market value, increased from 5.5% in fiscal 2012 to 6.5% in fiscal 2013, and was 6.0% in fiscal 2014. The university budget anticipates the draw rate to be 5.9% in fiscal 2015, with a goal of gradually reducing the rate over time to what management considers a best practice of 5%. Fitch considers the current draw rate above average, but still within the 5%-6% range seen in the sector.

HEALTHY BALANCE SHEET

Positive operations over time have allowed the university to grow balance sheet resources. In fiscal 2014, available funds (defined as cash and investments not permanently restricted), totaled $172 million, equal to a healthy 189% of operating expenses and a more limited but still solid 129% of debt ($133 million). Fitch considers these ratios solid compared to peer institutions in the 'A' rating category.

HIGH DEBT BURDEN

UScience's debt has an amortizing fixed-rate structure, with MADS of $8.6 million due in fiscal 2022. Annual obligations are approximately equal to this level through 2037. As a percentage of adjusted operating revenues (including the endowment distribution), MADS was 9% in fiscal 2017 - a debt burden that Fitch views as high.

In fiscal 2014, however, net income available for debt service provided 1.9x coverage of the MADS burden, which is comparable with the Fitch rated peer group. Partially mitigating this high debt burden is the university's historically consistent operations and an adequate balance sheet cushion.

The university does not have new debt plans at this time, but is in the midst of capital and strategic planning, which is expected to lead to a new capital campaign. Management is also assessing third-party financing options for student housing. Fitch will review debt plans, if any, when they are available. At this time, given enrollment pressures and a high debt burden, Fitch does not consider USciences to have significant debt capacity at the current rating.

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

In addition to the sources of information identified in Fitch's Criteria, this action was additionally informed by information from the underwriter, BofAML.

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria' (May, 2014)'.

--'Fitch Affirms University of the Sciences, PA, Revenue Bonds at 'A-' (Aug. 20, 2014).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=970056

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Contacts

Fitch Ratings
Primary Analyst
Susan Carlson
Director
Fitch Ratings, Inc.
+1-312-368-2092
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Susan Carlson
Director
Fitch Ratings, Inc.
+1-312-368-2092
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com