NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'BBB-' rating on approximately $36.2 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.
SECURITY
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 positive operating results and adequate liquidity levels for the rating category counterbalanced by very high reliance on student-generated revenues, a highly competitive geographical market and a high debt burden, that includes a bullet maturity in 2019.
ENROLLMENT PRESSURES PERSIST: HFU's declining headcount enrollment continues to pressure net tuition revenues due to growing institutional aid requirements, market pressures and internal management changes. Favorably, HFU adequately managed the lower enrollment in its fiscal 2014 and fiscal 2015 operating budget. Preliminary fall 2015 enrollment figures exceed the university's budgeted enrollment.
IMPROVED OPERATIONS: HFU generated a positive operating margin in fiscal 2014 after achieving just above break-even results in fiscal 2013. The margin is expected to be positive again in fiscal 2015 in accordance with its five-year financial plan largely due to moderately high tuition rate increases and effective cost containment measures.
LEADERSHIP TRANSITION: HFU's new management team is in the third year of the transformation that began in fiscal 2013. A new long-term strategic planning process is expected to position HFU for enrollment growth over the next five years. The new management team successfully implemented significant cost efficiencies and reductions in fiscal 2014 and fiscal 2015.
MODERATING DEBT BURDEN: Maximum annual debt service (MADS) is high based on fiscal 2014 unrestricted operating revenues, after 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.
RATING SENSITIVITIES
BALANCE SHEET PRESSURES: Further weakening of Holy Family University's already low available funds level relative to operations and debt would pressure the rating.
MARGIN EROSION: Holy Family University's failure to achieve enrollment targets, leading to declining net tuition revenue and significantly weaker operating margins than envisioned under its financial plan, will yield negative rating pressure.
CREDIT PROFILE
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 76 full-time faculty serving a diverse student body of approximately 2,658 students.
POSITIVE OPERATIONS
HFU's returned to positive operations generating a 4.2% operating margin in fiscal 2014 in accordance with its five-year plan, after essentially break-even operations in fiscal 2013. Actual results are better than projections presented to Fitch during the last review which is largely due to new management's effective cost containment efforts.
Historically, HFU has generated slim but positive margins (averaging 1% from fiscal 2010 to fiscal 2014), despite a deficit in fiscal 2012. HFU's operating pressures in recent years have been due to weakening enrollment and compounded by HFU's need to increase its institutionally funded financial aid. Management continues to rely on institutionally funded financial aid to bring the freshmen discount to a more competitive level, which accounts for the decrease in net tuition revenues in the past two fiscal years. Affordability concerns are expected to drive lower tuition rate increases in fiscal 2016 and fiscal 2017 which could further reduce this revenue source.
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. 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, would negatively affect operations and the current rating.
ENROLLMENT CHALLENGES
Headcount enrollment continued to decline, by 10.1% to 2,658 students in fall 2014, after declining 4.5% in fall 2013. Management believes the actual fall 2014 enrollment was a byproduct of old policies and programs since changed under new leadership.
The decline in the incoming freshmen and transfer classes in fall 2014 was a direct result of internal challenges which included two years of having no enrollment management leadership and an inconsistent marketing/branding approach to the market, according to management. Both issues have now been addressed.
HFU has engaged an external consultant to complete an assessment of academic programming and align the external market with demand. Planning will take place over fiscal 2016 to develop a three-to-five-year strategic plan with implementation expected to start in summer 2016.
The ability of the new senior leadership team to execute near-term strategies and enable HFU to stabilize enrollment in fall 2015 will be critical to maintaining the current rating. The fall 2015 plan currently calls for a 2% increase in enrollment by means of stabilizing nursing enrollment, program restructuring, and growth in accelerated degree cohorts and programs.
Fitch views a decrease in enrollment as a concern, but mitigated by the expectation that HFU can manage the impact to its operating budget and remain balanced. HFU is located in a very competitive market, which could always challenge enrollment.
ADEQUATE BALANCE SHEET RESOURCES
Available funds (Fitch defines as cash and investments not permanently restricted) totaled $21.7 million at fiscal year-end 2014, which is equal to 49.9% of operating expenses and 47% of pro forma debt. These ratios, improved over last year, are slim but adequate for the Fitch's 'BBB' category.
Long-term investments at fiscal year-end 2014 totaled $18.6 million, with $3.9 million classified as true endowment, $10.6 million as quasi-endowment and the remaining classified as other investment assets. In addition, the university had $7.5 million of unrestricted cash and equivalents, which was available for operating liquidity and planned capital projects. These levels are slightly improved over fiscal 2013.
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 six months to develop a deferred maintenance strategy for implementation in fiscal 2016.
According to management, HFU has implemented a new endowment spending policy but there are no anticipated draws on balance sheet resources for any other purpose 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 MADS 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 16% of fiscal 2014 unrestricted operating revenues; however, based on average annual debt service (AADS), debt burden is a more moderate 6.4% and supported by sound AADS coverage of 2.2x. Management expects to be able to restructure the bullet payment prior to the due date and will provide more details closer to that date.
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
Related Research:
--'Fitch Affirms Holy Family University's (PA) Revs at 'BBB-'; Outlook Stable' (July 18, 2014).
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. College and University Rating Criteria (pub. 12 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013
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