Fitch Affirms William Paterson University (NJ) Revs at 'A+'; Outlook Revised to Negative

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to the following bonds issued on behalf of William Paterson University (WPU), NJ:

--$57.6 million of New Jersey Educational Facilities Authority (NJEFA) revenue refunding bonds, series 2016E.

The bonds are expected to be sold via negotiation on or about the week of July 25. Proceeds will refinance a portion of the outstanding series 2008C bonds and pay costs of issuance.

In addition, Fitch has affirmed the ratings on the following bonds issued on behalf of WPU:

--$162.6 million NJEFA revenue bonds at 'A+'.

The Rating Outlook is revised to Negative from Stable.

SECURITY

The bonds are a general unsecured obligation of the university, payable from all legally available funds.

KEY RATING DRIVERS

ENROLLMENT CHALLENGES: The Negative Outlook reflects continued enrollment declines through fall 2015, which will further reduce net student revenues from tuition and auxiliaries. Over half of WPU's operating revenues come from net student charges, and the university operates in a competitive environment.

OPERATING DEFICIT: WPU generated a GAAP-basis operating deficit in fiscal 2015 and expects a similar result in fiscal 2016, following a five-year trend of thinning operating margins. A return to balanced operations will require enrollment growth, as material increases in state support or net tuition per student are unlikely.

BALANCE SHEET CUSHION: WPU maintains adequate balance sheet resources, which provide a measure of financial flexibility and support the rating as the university manages through a period of challenged enrollment. Available funds at June 30, 2015 equaled 46.7% of operating expenses and 52.1% of debt.

MANAGEABLE DEBT BURDEN: WPU's debt burden is moderately high but compares favorably to similarly rated peers and to other New Jersey public universities. Maximum annual debt service (MADS) equals 7.1% of fiscal 2015 operating revenues. Coverage remains adequate at 1.2x in fiscal 2015 despite the trend of weakening cash flow.

RATING SENSITIVITIES

STABILIZED ENROLLMENT: Failure of William Paterson University (WPU) to stabilize enrollment and improve net tuition revenue over the two-year Outlook period would likely lead to a rating downgrade.

BALANCED OPERATIONS: Maintaining the current rating requires a return to balanced GAAP-based operations.

ADDITIONAL DEBT: WPU is evaluating a potential public-private partnership to construct student residence halls, pending renewal of the state's legislative framework for such projects. Material additional debt could pressure cash flow and negatively affect the rating.

CREDIT PROFILE

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.

ENROLLMENT CHALLENGES CONTINUE

Enrollment trends have been negative over the past five years. Total headcount has declined 5.6% since fall 2011 to 10,869 in fall 2015. FTE enrollment has also declined 4.3% since fall 2011 to 8,551 in fall 2015. Losses have been concentrated in the undergraduate segment, which makes up 87% of the university's total enrollment.

Negative enrollment trends over time drive the Negative Outlook and reflect a competitive environment and demographic shifts away from traditional students. For fall 2014 (fiscal 2015), WPU attempted to modify its scholarship matrix to spread a flat dollar amount over more students. The strategy was unsuccessful in the competitive environment and exacerbated long-term competitive challenges, resulting in a smaller incoming class and overall 4.1% undergraduate enrollment decline. Fitch believes the episode demonstrates the high sensitivity to price among potential students, which limits WPU's ability to generate additional net tuition revenues per student.

WPU unwound its aid reduction strategy for fall 2015 (fiscal 2016), driving improved yield rates and a larger, though slightly below budget, incoming class. However, total enrollment declined unexpectedly and fell well short of targets (10,869 versus target of 11,407), which had assumed some enrollment growth. A 2.2% decline in undergraduate enrollment reflected weaker retention of continuing students and the ongoing effects of smaller classes in prior years. WPU has increased academic and student life support to traditional freshmen in recent years, and freshmen-to-sophomore retention held relatively steady at 75%. However, management reports that weaker retention for other continuing students drove the decline.

The university expects to improve fall 2016 (fiscal 2017) enrollment and is targeting more moderate growth of about 1.5% - 2% per year going forward. WPU continues to expand high-school recruiting efforts and community college articulation agreements to grow the incoming class. To increase retention of continuing students, the university has invested in its advising program and related analytical tools to increase student support. In addition, a new supplemental scholarship for retention is being offered to certain students starting fall 2016.

Fitch considers management's enrollment strategy reasonable. However, recent trends demonstrate the risk that external factors or execution issues could constrain WPU's ability to grow enrollment and net tuition revenue. Failure to stabilize enrollment and improve net tuition revenue over the two-year Outlook period would likely lead to a downgrade.

OPERATING DEFICITS

WPU's operating results have weakened over the past five years due to negative enrollment trends and stagnant state operating appropriations. WPU's margins thinned but remained positive on a GAAP basis from fiscal 2011 to fiscal 2014. However, the unexpected fall 2014 enrollment decline led to a small operating deficit in fiscal 2015. The operating margin fell to negative 3.4% as reported. Excluding the effects of GASB accounting changes starting fiscal 2015, Fitch estimates that the margin fell to negative 1.0% in fiscal 2015 on a comparable basis to the prior year's 1.7% margin.

Declining net student tuition and auxiliary revenues made up 52% of WPU's fiscal 2015 operating revenues and drove weaker operating results. Net student charges have declined by an average of 1.4% per year since fiscal 2012, including by 2.9% in fiscal 2015. In addition, state appropriations for operations have not grown in recent years and are expected to remain generally flat going forward. WPU has managed its expenses fairly well over the period, with total operating costs growing by just over 2% per year on average. However, even moderate expense growth has not been matched by declining total operating revenues.

WPU expects a similar operating deficit in fiscal 2016, but a return to balance in fiscal 2017 assuming moderate recovery in enrollment. Maintenance of the current rating will depend on WPU's ability to grow its operating revenue and return to balanced operations.

ADEQUATE FINANCIAL RESOURCES

WPU maintains adequate balance sheet resources, which provide a measure of financial flexibility as the university manages through a period of challenged enrollment. Available funds, defined as cash and investments not permanently restricted, totaled $101.7 million at June 30, 2015. Available funds have been fairly stable over the past five years, with moderate fluctuations due to positive cash flow and the timing of internally funded capital investments. Available funds equal 46.7% of operating expenses and 52.1% of debt. These ratios compare favorably to peers and support the current rating level.

MANAGEABLE DEBT BURDEN

WPU has a conservative debt structure and a moderately high but manageable debt burden. All debt is fixed-rate, with a declining total debt service structure. Annual debt service equaled a moderate 6.6% of operating revenues in fiscal 2015, and the MADS (2018) burden was a slightly higher but still manageable 7.1% of fiscal 2015 operating revenues. Coverage has narrowed with weakening cash flow in recent years but remains adequate at 1.2x in fiscal 2015.

The series 2016E bonds will refund most of the outstanding series 2008C bonds for savings, with no change in structure or maturity versus the outstanding bonds. The university has no additional direct debt plans at this time.

However, WPU may pursue a public-private partnership for construction of two additional replacement dormitories on campus over the near term. The facilities are in the design stage but cannot obtain financing unless New Jersey renews its currently expired legislation governing such partnerships for new projects, which management considers likely. Fitch will evaluate any updated legislative framework and the financing structure if the projects move forward, and may consider the debt in WPU's ratios depending on the structure and terms. Responsibility for material additional debt without a commensurate increase in revenues or resources could pressure cash flow and increase overall credit risk.

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

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008906

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008906

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Tipper Austin
Associate Director
+1-212-908-9199
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
Secondary Analyst
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Tipper Austin
Associate Director
+1-212-908-9199
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
Secondary Analyst
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com