Fitch Affirms Anderson University (IN) Revenue Bonds at 'BB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BB+' rating on approximately $41.3 million of the City of Anderson, Indiana Economic Development Revenue Refunding and Improvement bonds issued on behalf of Anderson University (AU).

The Rating Outlook is Stable.

SECURITY

The bonds are an unsecured general obligation of the university. As additional security, there is a cash-funded $3.7 million debt service reserve fund.

KEY RATING DRIVERS

UNEVEN OPERATING HISTORY: GAAP-based operating performance has been uneven over the past five fiscal years. AU maintained near-breakeven operations in fiscal 2013 and (unaudited) 2014, despite pressured enrollment-driven revenues, by managing their expenses carefully.

ENROLLMENT-RELATED CHALLENGES: Anderson's enrollment fell moderately in fall 2013 and fell again slightly in fall 2014 (preliminary). However, the main traditional undergraduate enrollment segment stabilized somewhat. Anderson's relatively small size and limited regional draw, combined with high dependence on student-generated revenues, make it quite susceptible to enrollment volatility.

NARROW FINANCIAL FLEXIBILITY: AU's financial flexibility is constrained by a competitive environment and a weak balance sheet. High tuition discounting (over 40%) and stiff competition limit Anderson's ability to raise tuition rates and generate additional revenues. Further, a limited balance sheet provides minimal cushion to absorb adverse changes in operating performance.

HIGH DEBT BURDEN: The university's debt burden remains high, with pro forma MADS consuming 11.2% of fiscal 2013 unrestricted operating revenues. MADS coverage has generally been at or near 1x over the past five years, which Fitch considers a moderate credit negative in light of limited financial cushion.

RATING SENSITIVITIES

CONSISTENTLY NEGATIVE GAAP OPERATIONS: The stable outlook assumes Anderson's ability to offset pressured net tuition revenue through growth or structural expense adjustments. A trend of negative GAAP-based operating margins would negatively affect the university's ability to service its debt from operations and would exert downward rating pressure.

SMALLER ENROLLMENT BASE: A trend of continuing declines in traditional undergraduate and graduate enrollment would make the university's operations more susceptible to enrollment fluctuations and would negatively pressure the rating.

ADDITIONAL DEBT: Incurrence of additional debt without a commensurate growth in financial resources or net operating income sufficient to service the debt could negatively affect the rating.

CREDIT PROFILE

Founded in 1917, Anderson University is a Christian university located in Anderson, Indiana (35 miles northeast of Indianapolis). AU was founded and is supported by the Church of God (COG) and is the only college affiliated with COG in the Midwest. The university offers around 60 undergraduate majors as well as graduate programs in business, music, nursing, and theology. The university also maintains a Department of Adult Studies that offers bachelor and associates degrees and non-credit programs for adult students.

Headcount enrollment totaled 2,403 in fall 2013, primarily consisting of traditional undergraduate students (~68%), graduate enrollment (~17%), and adult students in traditional and non-traditional programs (~15%). The university's regional accreditation (Higher Learning Commission of North Central Association) was most recently reaffirmed in 2008 for a 10-year term.

UNEVEN OPERATING HISTORY AND ENROLLMENT-RELATED CHALLENGES

GAAP-based operating performance has been uneven in recent years ranging from a high of 4.1% in fiscal 2012 to a low of -5.2% in fiscal 2011. Uneven financial results are consistent with a non-investment grade rating and reflect ongoing softness in student-generated revenues, which are AU's largest revenue source (80.5% of fiscal 2013 unrestricted operating revenues). AU maintained breakeven operating margins in fiscal 2013 and (unaudited) 2014 through careful management of expenses, despite pressured net tuition revenues.

Net tuition revenues were flat on average from fiscal 2009 to fiscal 2013 largely due to soft enrollment trends. Headcount fell by 4.5% to 2,403 in fall 2013, which management attributes partially to a now-resolved technical glitch affecting online applications. Preliminary fall 2014 enrollment shows another, smaller decline in headcount but is still within fiscal 2015 budget assumptions. The incoming freshman class also appears slightly larger than in fall 2013, suggesting that AU's largest segment is stabilizing.

Management is pursuing several strategies to bolster enrollment, including marketing efforts, student retention initiatives, curricular changes to accommodate more transfer students, and programmatic changes to better align with market needs. Fitch views these adjustments positively. However, AU's relatively small size and limited regional draw make it susceptible to fluctuations in enrollment.

NARROW FINANCIAL FLEXIBILITY

A significant portion of student tuition is discounted annually (40.5% in fiscal 2013) as a result of a competitive environment and AU's high cost of attendance relative to its peer group. Management continues to take steps to curb increases in student charges and tuition discounting. Still, Fitch believes AU's high discounting rate and limited pricing flexibility constrain the university's ability to materially increase revenue by raising tuition rates.

The university's financial flexibility is further restricted by its thin level of balance sheet resources. Available funds, defined by Fitch as cash and investments not permanently restricted, totaled $10.6 million as of May 31, 2013 and grew further in fiscal 2014 (unaudited). While improved from prior years, available funds still provided limited cushion of 20.4% relative to fiscal 2013 operating expenses and 17.8% relative to pro forma long-term debt.

UNCHANGED LEVERAGE POSITION

The university's debt burden remains high. Pro forma MADS of $5.9 million (includes a balloon payment related to obligations guaranteed by an affiliated organization) due in fiscal 2018 consumed 11.2% of fiscal 2013 unrestricted operating revenues. MADS coverage from operations has generally been at or near 1x over the past five years. Fitch considers this a moderate weakness given AU's limited financial cushion. However, operations covered annual debt service by 1.2x in fiscal 2013, with similar coverage for fiscal 2014 (unaudited). Fitch expects Anderson's debt burden to moderate over time, as outstanding obligations are repaid and near-term capital needs are funded primarily through operations and fundraising.

Anderson is pursuing an off-balance sheet, non-recourse financing to purchase an existing student housing facility, which the university currently leases from its owner. Fitch does not expect the purchase to have a material effect on AU's credit profile. Anderson's financial results already reflect the costs of operating the facility, and future payments under the existing lease are already included in Fitch's calculation of long-term debt. However, Fitch will review the proposed transaction to determine the effects, if any, for bondholders.

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

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria' (May 12, 2014);

--'Fitch Affirms Anderson University (IN) Revenue Bonds at 'BB+'; Outlook Stable (Sept. 18, 2013).

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=870314

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Contacts

Fitch Ratings
Primary Analyst
Tipper Austin
Analyst
Fitch Ratings, Inc.
+1-212-908-9199
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Alexander Vaisman
Associate Director
+1-212-908-0721
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
Tipper Austin
Analyst
Fitch Ratings, Inc.
+1-212-908-9199
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Alexander Vaisman
Associate Director
+1-212-908-0721
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