NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to the approximately $45 million series 2015 revenue and refunding bonds issued by the New Jersey Educational Facilities Authority (NJEFA) on behalf of William Paterson University (WPU, or the university).
The bonds are expected to be sold via negotiation on or about the week of August 3. Proceeds will be used to finance the renovation and construction of certain academic facilities (the Hunziker Project) and to current refund a portion of the outstanding series 2005E revenue bonds, and to pay costs of issuance.
In addition, Fitch downgrades approximately $164 million of outstanding revenue bonds to 'A+'.
The Rating Outlook is Stable.
The bonds are a general obligation of the university, payable from all legally available funds.
KEY RATING DRIVERS
RATING DOWNGRADED: The downgrade is driven by WPU's history of thinning margins due to increased institutional aid and pressured enrollment levels, in conjunction with flat operating support from the state of New Jersey (rated 'A'/Negative Outlook by Fitch).
THINNING MARGINS: The 'A+' rating reflects WPU's ability to meet expectations of at least break-even operations. The university's historically positive, though narrowing, operating performance supports adequate liquidity levels and coverage of pro forma debt service. Management expects another year of positive but thin margins in fiscal 2015, in line with fiscal 2014 results.
CHALLENGED ENROLLMENT: WPU's weakening student demand profile, combined with its limited tuition-raising flexibility and higher institutional aid requirements, have caused a decline in net tuition revenue. Fitch notes that enrollment pressure exists with respect to less costly alternative community colleges and competing public universities.
VULNERABILITY TO STATE FUNDING CUTS: After several years of flat operating appropriations (fiscal 2012 to 2015 (unaudited)) and thinning margins, a $2.7 million or 8.4% reduction in the direct operating appropriation is expected in fiscal 2016. Reduced levels of operating support in future years, combined with declining net tuition revenues could continue to compress margins if WPU fails to adequately manage expenses.
MODERATELY HIGH DEBT BURDEN: The university's pro forma debt burden is moderately high but manageable, with mandatory fee revenues dedicated, but not pledged, to related bond obligations. Planned capital projects are expected to be funded by state-awarded bond funds, internal resources and the series 2015 bonds.
OPERATING PERFORMANCE: William Paterson University's ability to generate at least break-even or positive operations allowing growth in liquidity levels is largely predicated on stability in net tuition revenue and state operating appropriations. Further constraints of either, without prudent expense management, could negatively impact operations and the rating.
ADDED LEVERAGE: While not presently anticipated, William Paterson University's incurrence of additional debt without a commensurate increase in available financial resources, could adversely pressure the rating.
Founded in 1855, William Paterson is a comprehensive mid-sized regional public university offering primarily undergraduate and graduate programs across five colleges, including business, education, and health sciences. The university is located on a suburban campus approximately 20 miles northwest of New York City, in Wayne Township, Passaic County, NJ.
THINNING OPERATING MARGINS
The operating margin tightened to 1.1% in fiscal 2014 but remains positive. Since fiscal 2010, margins are significantly reduced from prior year levels (from 8.9% in fiscal 2010). WPU maintains its board policy to generate a positive margin. For fiscal 2015 (unaudited), management estimates a slight improvement with a margin of about $3.3 million or 1.5% and net tuition revenues slightly above fiscal 2014 levels. The margin weakening over several years and expectations that WPU will continue to achieve these thin margins for the next several years supports the downgrade.
Additionally, two consecutive years of declining net tuition revenues, growth in WPU's institutional aid requirement over several years, weakening demand and high price sensitivity further support the downgrade. Management expects net student tuition to stabilize in fiscal 2015 and be slightly ($400,000) above fiscal 2014 levels, even though enrollment was significantly down from budget in fall 2014.
In fiscal 2015, WPU's total state annual appropriations increased by 2.3%, similar to the prior year, after 4% growth in 2013. Though WPU's general operating appropriation has remained flat for the last four fiscal years (2012-2015) at $32.7 million, the state-paid fringe benefit has grown. Management expects that the fringe appropriation will continue to increase modestly by 1% per year; however, appropriation levels for fiscal 2016 reflect a 7% or $2.39 million reduction in the general operating appropriation and future levels of state support remain uncertain given near-term pressures at the state level.
WPU's significant dependence on state operating appropriations is a concern given the lackluster growth in this funding source. Fitch views WPU as increasingly vulnerable to multi-year state funding cuts which could negatively impact already thinning margins unless enrollment strategies improve demand. Generally, revenue growth is limited and WPU must effectively manage expenses to keep it positive.
Enrollment pressure persists but WPU expects some improvement in fall 2015 based on the current level of deposits. Total headcount enrollment dipped about 366 students or 3.2% in fall 2014 to 11,048 after flat enrollment the prior year. This continues the notable trend of declining undergraduate enrollment (87% of the total enrollment base), which was down 4% or 408 students to 9,619 in fall 2014.
Management cited the reasons for the enrollment shortfall as twofold: (1) externally driven by demographics and less traditional students in pipeline; and (2) internally driven by modifications to the scholarship matrix. In fall 2014, WPU increased its need-based aid and spread it over a greater proportion of students but this resulted in a less competitive financial aid package relative to its competitors. Management believes it has codified policies and procedures relative to scholarship distribution and is in the process of mapping an enrollment strategic plan.
Fall 2015/fiscal 2016 budget assumptions are based on a total enrollment headcount of 11,407 students (3.2% change from prior year), comprising 3,750 new students and 7,657 continuing students. Management expects to maintain total enrollment growth of 3% per year. Fitch will continue to monitor WPU's ability to achieve enrollment goals presented, which are key to maintaining financial stability.
ADEQUATE FINANCIAL RESOURCES
Available funds, defined as cash and investments less restricted net assets, have grown consistently over time due to recurring annual operating surpluses and a conservative debt policy. Available funds totaled $112.7 million as of the last audit (FYE June 30, 2014) which equates to 52.6% of operating expenses and 60.5% of pro forma long-term debt.
Fitch notes that WPU's 'A+' rating assumes modest growth in liquidity over time. The inability to continue to grow its balance sheet from operations could result in rating pressure.
MANAGEABLE DEBT LOAD
Total pro forma long-term debt, including the proposed bond issue, is approximately $186.4 million. Aggregate debt amortization is front-loaded and level through 2027, declining thereafter. Net income available from 2014 operations covered pro forma maximum annual debt service (MADS) of $15.5 million by 1.4x, and increases to 1.5x per unaudited 2015 operating results, adequately offsetting a modestly high pro forma MADS burden of 7.1%.
Aside from the current issue, the university does not have any other debt issuance plans at this time. Near-term capital projects are expected to be fully funded with a combination of internal resources and funds awarded under the state GO bond issuance. Fitch expects that WPU can accomplish proposed capital projects with internal resources. However, any increase in additional debt without a commensurate increase in resources (by means of operating surpluses or fundraising) to offset such debt may affect the rating and/or Outlook.
Additional information is available at 'www.fitchratings.com'.
Applicable Related Research:
--'Fitch Affirms William Paterson University (NJ) Rev Bonds at 'AA-'; Outlook Stable (Sept. 24, 2014);
--'William Paterson University of New Jersey' (October 2012).
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. College and University Rating Criteria (pub. 12 May 2014)
William Paterson University of New Jersey
Dodd-Frank Rating Information Disclosure Form