Fitch Affirms Midwestern University, AZ at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A+' rating on the approximately $149 million outstanding series 2010 bonds issued by the Industrial Development Authority of the City of Glendale, Arizona on behalf of Midwestern University (MWU).

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of the Obligated Group, which currently consists only of MWU. In addition, MWU has pledged a security interest in its unrestricted receivables.

KEY RATING DRIVERS

SOUND POSITION IN NICHE MARKET: The 'A+' rating reflects MWU's success in its health sciences offerings on two campuses in Downers Grove, IL and Glendale, AZ. Experienced management has a long track record of implementing new programs and strategic initiatives. Strong student demand, very strong operating margins and debt service coverage, and solid liquidity levels support the rating.

VERY STRONG OPERATING MARGINS: The university consistently generates double digit operating margins, fueled by strong demand for health sciences programs.

STRONG DEMAND: MWU has a highly selective admissions process and enjoys strong demand for its various health science programs, including the colleges of osteopathic medicine. Enrollment continues to grow at a manageable pace.

SOLID BALANCE SHEET RESOURCES: MWU's available funds (AF, cash and investments less permanently restricted net assets) continued moderate growth as annual operating surpluses are largely directed to capital expenditures. AF equaled 141.2% of expenditures and 125.8% of debt at June 30, 2015 (unaudited), in line with expectations for the rating category.

HIGH BUT MANAGEABLE DEBT BURDEN: The university's debt burden remains high but manageable, with MADS consuming 11% of fiscal 2014 operating revenues (MADS includes a large balloon maturity in 2028). MWU has demonstrated strong coverage of outstanding debt, including fiscal 2014 MADS coverage of 3.3x from operations.

RATING SENSITIVITIES

MAINTAIN POSITIVE OPERATIONS: Midwestern University's (MWU) ability to achieve strong operating margins while absorbing new program expenses and debt service will be key in maintaining the current rating.

AVAILABLE FUNDS GROWTH: Management expects MWU's capital spending to slow somewhat in coming years, which could improve balance sheet ratios. Significant growth in resources relative to debt and operating expenses could improve the rating over time.

CREDIT PROFILE

Midwestern University is a not-for-profit corporation, providing primarily graduate education in the health sciences. The university has two campuses. The Downers Grove campus is located on 117 acres in suburban Chicago, and has four major degree programs: osteopathic medicine, pharmacy, college of health sciences, and dentistry. The Glendale campus is located on approximately 154 acres in suburban Phoenix and operates separate schools of osteopathic medicine, health sciences, pharmacy, dentistry, veterinary medicine and optometry. The health science programs include speech and language pathology, occupational therapy, physical therapy, physician assistant, cardiovascular science, biomedical sciences, podiatric medicine, nurse anesthesia and clinical psychology.

MWU opened its Glendale campus in 1995, and at both campuses has added new programs within its health sciences focus in recent years. MWU's initial academic focus was osteopathic medicine. Fitch views subsequent programmatic and geographical diversification positively. The experienced management team has a strong track record of building successful programs and executing strategic initiatives.

VERY STRONG OPERATING PERFORMANCE

MWU's history of strong operations continues with a fiscal 2014 operating margin of 25.3% on a GAAP basis. Unaudited fiscal 2015 figures show similarly strong results. These margins indicate continued net tuition growth and good management of expenses as MWU has expanded program offerings. Like many other private universities, MWU is highly reliant on student generated tuition and fees (88.3% of fiscal 2014 operating revenues). The university is concentrated in the health sciences, although with geographic and programmatic diversity within that field.

STRONG DEMAND

Demand for the university's various health science programs remains sound. Total headcount increased by 6.1% to 6,063 in fall 2014 as several newer programs continued ramp-up growth (dentistry and speech-language pathology at Downers Grove, veterinary medicine at Glendale). Growth is expected to flatten out as specific programs' capacities are reached.

Admissions remain highly selective, and applications are growing across most programs. The lowest acceptance rate in fall 2014 was 7% for osteopathic medicine at Downers Grove, and most other programs generally accepted between 10% and 50% of applicants. Fitch views MWU's market position favorably and believes MWU is well-positioned to maintain generally stable enrollment going forward.

SOLID LIQUIDITY

AF have increased to $377.6 million as of June 30, 2014, up from $219.4 million in fiscal 2010. Growth is primarily due to healthy operating surpluses, which have also funded significant capital expenditures. AF equaled 157.1% of fiscal 2014 operating expenses and 120.4% of debt. AF improved incrementally in fiscal 2015 (unaudited). AF ratios are in line with expectations for the rating category. Management has indicated that there are no additional debt plans at this time and that they expect expansion and capital spending to slow in coming years. Fitch notes that a material increase in AF relative to operating expenses and debt could improve the rating over time.

MANAGEABLE DEBT PORTFOLIO

MWU's debt burden is high, with MADS consuming 11% of fiscal year 2014 operating revenues. However, MADS includes a $15 million balloon maturity in 2028. Adjusting for that maturity, MWU's MADS burden would be a more moderate 7%. Concern over the debt burden is largely mitigated by very strong operating margins and debt service coverage. Fiscal 2014 operations produced MADS coverage of 3.3x (or 5.2x, excluding the balloon maturity).

MWU's debt structure is manageable. Approximately one third of its debt is variable-rate, all of which is synthetically fixed with swaps extending to call or maturity dates. Amortization is generally front-loaded, with annual debt service level through fiscal 2025 and declining thereafter (except for 2028 balloon maturity). The directly purchased series 2013 bonds added $30 million of new money and refunded two prior series, reducing MWU's renewal risk. All series amortize, but the series 2013 bonds could be tendered at the end of any 5-year interest rate period. Fitch believes MWU has ample resources from its reserves and strong operations to account for this possibility.

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

Related Research:

--'Fitch Affirms Midwestern University, AZ at 'A+'; Outlook Stable' (Aug. 2013).

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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Contacts

Fitch Ratings
Primary Analyst
Tipper Austin, +1-212-908-9199
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10025
or
Secondary Analyst
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Committee Chairperson
Maura McGuigan, +1-212-908-0591
Senior Director
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Tipper Austin, +1-212-908-9199
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10025
or
Secondary Analyst
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Committee Chairperson
Maura McGuigan, +1-212-908-0591
Senior Director
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com