Fitch Rates Pepperdine University's (CA) Series 2015 Revs 'AA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings assigns an 'AA' rating to the expected issuance of $77 million California Educational Facilities Authority (CEFA) revenue bonds, series 2015, issued on behalf of Pepperdine University (Pepperdine or the university).

The Rating Outlook is Stable.

Pepperdine expects to issue a total of $77 million of series 2015 bonds through negotiated sales the week of July 20, 2015. Bond proceeds will be used to refund the university's currently outstanding series 2005A and 2005B bonds and pay costs of issuance.

SECURITY

The bonds are an unsecured absolute and unconditional general obligation of the university.

KEY RATING DRIVERS

'AA' RATING ASSIGNED: The 'AA' rating reflects Pepperdine's solid financial profile, which is highlighted by a strong balance sheet, consistently positive operations, and a relatively low debt burden that supports good maximum annual debt service (MADS) coverage. Additional credit strengths include steady undergraduate enrollment, favorable management practices, and unique campus located in Malibu, CA.

STABLE ENROLLMENT TRENDS: Fitch views Pepperdine's enrollment trends as stable, with freshmen admissions and matriculations increasing over the past two years, while graduate student demand has followed a similar trend. However, Pepperdine's freshmen matriculation rate is lower than peer institutions.

EFFECTIVE MANAGEMENT PRACTICES: Pepperdine has a history of solid financial performance, which Fitch believes is a reflection of the organization's effective management practices that include conservative budgeting and prudent long-range financial planning. Additionally, management has a conservative debt structure as the university has 100% fixed-rate debt with no swaps.

COMPETITIVE OPERATING ENVIRONMENT: The University operates in a competitive environment located in southern California. However, Fitch believes Pepperdine has a strong reputation and brand in addition to its location in Malibu, which help serve as market differentiators.

RATING SENSITIVITIES

CONSISTENT PERFORMANCE EXPECTED: Fitch expects Pepperdine to continue to generate consistent positive margins, which should support solid MADS coverage. Although unexpected, any significant deterioration to Pepperdine's strong balance sheet would be viewed negatively.

STUDENT HOUSING EXPANSION: Pepperdine has limited capital needs over the medium term, with the exception of a potential student housing project in the 2017-2018 timeframe. Pepperdine intends to expand student housing capacity on its Malibu campus over the medium term although no specific financing plans are available at this time. Fitch would expect any incurrence of additional debt will be accompanied by a growth in resources commensurate with the additional leverage. Fitch will evaluate any financing plans at the appropriate time.

CREDIT PROFILE

Pepperdine University, founded in 1937, is a Christian University in the Church of Christ tradition. The university is composed of five schools - Seaver College of Letters, Arts and Sciences; Graduate School of Education and Psychology; Graziadio School of Business and Management; School of Law; and School of Public Policy.

In addition to the university's 830-acre main campus located on the coast overlooking the Pacific Ocean in Malibu, CA, there are six international sites, along with a site in Washington, DC, that support the university's study-abroad program. In fiscal 2014, Pepperdine had adjusted total unrestricted operating revenue (including portion of endowment payout) of $314.4 million.

SOLID FINANCIAL PROFILE

Pepperdine's financial profile is highlighted by a strong balance sheet, consistently positive operations, and a relatively low debt burden that supports good MADS coverage.

As of July 31, 2014, available funds, defined by Fitch as cash and investments not permanently restricted, totaled $644.9 million, an improvement from fiscal 2013's $572 million. This covered fiscal 2014 operating expenses and long-term debt by 220.5% and 231.3%, respectively, both considered comparable for the 'AA' rating category and viewed as a primary credit strength.

In fiscal 2014, the university generated a solid 7% operating margin (adjusted for the full endowment payout), which was increased from fiscal 2013's 5.9% margin and reflects the university's history of consistently generating positive operations. Management attributes this consistency to good undergraduate enrollment growth and stability along with prudent expense management practices.

Solid operations supported healthy coverage of MADS of 3.9x in fiscal 2014, which has been consistent over the past five fiscal years. The university's debt service is relatively flat and fixed-rate with no swaps, with the exception of one taxable series of bonds, which has a $50 million bullet payment in fiscal 2020. Management will determine whether to refinance or repay this series closer to 2020.

STABLE ENROLLMENT TRENDS

Fitch views Pepperdine's historical enrollment trends as stable, with freshmen admissions and matriculations increasing over the past two years, while graduate student demand has followed a similar trend. However, Fitch notes Pepperdine has a lower freshmen matriculation rate relative to its peer institutions at 21% in 2014.

Specifically, freshman applications reached an all-time high in 2014 to 9,720 from 6,426 in 2010. Increased applicants have also led to increased freshman admissions and relatively consistent matriculation, which was 784 in 2014 (789 in 2013) and is viewed positively. Undergraduate enrollment stability is a credit positive as the university operates in a competitive environment located in southern California. Despite the competitive concerns, Fitch believes Pepperdine has a strong reputation and brand in addition to an attractive location in Malibu, all of which help serve as market differentiators.

Overall, within Pepperdine's graduate programs, both admissions and matriculations increased from the prior year to 4,004 (from 3,500) and 1,789 (from 1,606) in 2014, respectively.

STUDENT HOUSING EXPANSION PROJECT:

Pepperdine intends to expand student housing capacity for approximately 358 students on its Malibu campus over the medium term although no specific financing plans are available at this time. Management is still contemplating the total size and scope of the project, but Fitch would expect any incurrence of additional debt will be accompanied by a growth in resources commensurate with the additional leverage. Fitch will evaluate any financing plans at the appropriate time.

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=987891

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987891

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Michael Burger
Director
+1-415-659-5470
Fitch Ratings, Inc.
650 California Street, Fourth Floor
San Francisco, CA 94123
or
Secondary Analyst
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Michael Burger
Director
+1-415-659-5470
Fitch Ratings, Inc.
650 California Street, Fourth Floor
San Francisco, CA 94123
or
Secondary Analyst
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com