Fitch Affirms University of La Verne's (CA) Revs at 'BBB+'; Outlook Positive

NEW YORK--()--Fitch Ratings affirms the 'BBB+' rating on the following series of bonds issued on behalf of University of La Verne (ULV):

--$68.4 million California Municipal Finance Authority, revenue bonds, series 2010A;

--$17.9 million California Educational Facilities Authority, revenue bonds, series 2005A

The Rating Outlook is Positive.

SECURITY

The bonds are a general obligation of the university, payable from legally available funds. Security interest in deeds of trust on certain portions of La Verne's campus and cash-funded debt service reserve funds provide additional bondholder security.

KEY RATING DRIVERS

FINANCIAL IMPROVEMENT DRIVES OUTLOOK: ULV has substantially improved its balance sheet resources in recent years by allocating annual operating surpluses to quasi-endowment funds. Continued improvement in financial position to a level characteristic of 'A' category Fitch-rated private colleges and universities would support upward rating movement.

STRONG OPERATING RESULTS: La Verne has consistently generated robust GAAP-based operating margins, averaging 7.1% over the past five fiscal years, supported by enrollment-driven revenue growth and conservative budgeting. Fitch considers ULV's prudent financial practices to be a credit strength.

FAVORABLE ENROLLMENT TRENDS: Healthy enrollment continues to bolster ULV's strong operations. The traditional undergraduate segment continues to expand, offsetting challenges in some graduate programs, particularly the College of Law (COL). Effective enrollment management is crucial for ULV given its very high (94.4%) reliance on student tuition and fee revenues

MANAGEABLE DEBT BURDEN: ULV's debt burden is moderately high but manageable. Maximum annual debt service (MADS) consumed 7.4% of fiscal 2013 operating revenues, but annual surpluses provide strong MADS coverage (2.8x in fiscal 2013). Possible debt-funded projects over the next five years will be detailed in a new long-range capital plan, expected to be completed in early 2015.

RATING SENSITIVITIES

ENROLLMENT STABILITY: Given La Verne's high reliance on student-generated revenues, enrollment stability is necessary to maintain strong operations and generate sound coverage.

BALANCE SHEET STRENGTH: Additional debt or draws on financial resources that materially increase the university's balance sheet leverage could prevent upward rating movement in the near term. Conversely, limited debt and reserve spending plans allowing for continued balance sheet improvement would likely support upward rating movement over the two-year Outlook period.

CREDIT PROFILE

ULV is a private university founded in 1891. It offers 70 undergraduate majors as well as graduate degrees and non-degree programs through four colleges, serving a headcount of roughly 10,000 students. Its main campus is situated on 38 acres in the City of La Verne (30 miles east of Los Angeles) and its College of Law is located nearby in the City of Ontario. In addition to providing degree programs at two military bases, the university's Regional Campus and Online Administration maintains seven regional campuses throughout southern California and offers programs online.

The University is accredited by the Western Association of Schools and Colleges, which affirmed La Verne's accreditation in 2012 for a period of eight years.

IMPROVED BALANCE SHEET RESOURCES

La Verne's balance sheet resources have improved in recent years due to reinvested operating surpluses and sound investment returns. Available funds (AF), defined by Fitch as cash and investments not permanently restricted, totaled $91.6 million at June 30, 2013, equal to a satisfactory 74.6% of operating expenses and 80.1% of debt. Unaudited fiscal 2014 financial data show significant continued growth in AF (roughly 30%) based on strong operations and investment returns. Fitch considers the university's practice of designating substantial portions of its annual operating surplus to quasi-endowment prudent.

Including board-designated quasi-endowment, La Verne's endowment investments totaled $48 million as June 30, 2014, up from $37.4 million the prior year. Investment allocations remain conservative, with only 12% currently allocated to alternative investments. Fitch also considers the spending policy, 4.75% of the prior 12 quarters' average market value, conservative.

CONTINUED POSITIVE OPERATING PERFORMANCE

La Verne's financial performance remains strong, supporting balance sheet growth. Fiscal 2013 operations (inclusive of endowment support) produced a robust margin of 11.1%. Unaudited results for fiscal 2014 indicate similarly positive performance. Financial results reflect better-than-budgeted student-generated revenues due to enrollment growth and conservative budgeting, as well as favorable expense variances, and untapped contingency reserves. Fitch expects that La Verne will maintain its markedly positive operating performance based on healthy enrollment trends and strong financial management. ULV's management team utilizes conservative budgeting practices and detailed multi-year forecasting, which Fitch views favorably.

HEALTHY ENROLLMENT TRENDS

The university is highly dependent on student-generated revenues as its primary revenue source. They provided 94.4% of annual operating revenues in fiscal 2013, underscoring the importance of healthy enrollment trends. La Verne's total headcount enrollment increased 3.3% in fall 2013 to 10,177, driven by growth in both undergraduate and graduate students, which Fitch views also favorably. Continued growth in the traditional undergraduate segment, an area that ULV has emphasized in recent years, drove an increase in undergraduate headcount of 3.4%.

Graduate headcount increased 3.2% to 4,961 after two years of declines largely related to challenges facing the COL and the College of Education and Organizational Leadership. Enrollment in the COL, which maintains provisional accreditation from the American Bar Association, continues to decline but the size of incoming classes appears to be stabilizing. In addition to adding a part-time program, the COL recently changed its tuition structure to a true cost (no discounting) model, resulting in media attention and possibly some additional interest so far. From a budgetary perspective, the COL's enrollment pressures remain manageable.

Fitch views favorably ULV's increasing enrollment despite significant competition for students from both in-state and out-of-state institutions. Further, ULV's enrollment base is well balanced across traditional undergraduates, adult learners, regional campuses, and several graduate programs. Fitch believes that this programmatic diversity somewhat offsets La Verne's high reliance on student-generated revenues.

MANAGEABLE DEBT BURDEN

The university's debt burden remains manageable, with annual debt service accounting for a moderate 5.3% of fiscal 2013 unrestricted operating revenues. Positive operating margins drove strong annual debt service coverage of 3.9x in fiscal 2013. The MADS burden (2015) is moderately high at 7.4% of 2013 operating revenues, but MADS remains manageable with 2.8x MADS coverage from fiscal 2013 operations. The debt structure is conservative, including only fixed-rate amortizing obligations, but includes a bank placement. ULV maintains ample headroom under the bank's financial covenants.

Management has indicated that additional debt for capital projects is possible over the next five years. The timing and amount of any such plans is not yet known. ULV is in the process of creating a long-range capital plan, expected to be completed in early 2015, that will define the size and funding sources of its capital projects through approximately 2021. It is expected that at least a portion of the capital plan will be funded through philanthropy. Additional debt or internal funding of capital projects that materially weakened the university's financial position would negatively pressure the rating and Outlook.

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 University of La Verne's (California) Revs at 'BBB+'; Outlook Stable' (Oct. 21, 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=888434

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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
Joanne Ferrigan
Senior Director
+1-212-908-0723
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
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com