Fitch Affirms Pitzer College, CA Revs at 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'A' rating on approximately $59.7 million of outstanding revenue bonds issued by the California Educational Facilities Authority (CEFA) on behalf of Pitzer College (Pitzer, or the college).

The Rating Outlook is Stable.

SECURITY

Revenue bonds are a general obligation of the college.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'A' rating reflects Pitzer's strong market position and demand characteristics supported by membership in The Claremont Colleges (TCC) and its consistently positive operating performance, inclusive of endowment spending, which drives healthy liquid resources. Pitzer is highly dependent on student tuition and fee revenue and has a high debt burden which tempers the rating.

REVENUE CONCENTRATION: Typical of many private higher education institutions, Pitzer's dependency on student-generated income is quite high but mitigated by strong demand and a well-managed discounting rate which continues to drive growth in net tuition revenues. Pitzer's already high selectivity continues to improve despite its highly competitive student market.

PRUDENT FISCAL MANAGEMENT: Conservative budgeting practices and timely measures taken by management, including a planned temporary reduction of endowment spending since fiscal 2010, provides rating stability.

HIGH LEVERAGE: The college's pro forma debt burden remains high including bank debt and the series 2009 bond issuance, with maximum annual debt service (MADS) consuming approximately 11.5% of fiscal 2014 operating revenues. This debt burden is expected to slowly moderate as debt is paid down. No new debt, except modest draws under an existing bank facility, is expected to be issued in the near term. Pitzer's balance sheet mitigates most of that concern.

RATING SENSITIVITIES

STUDENT DEMAND: Rating stability is predicated on Pitzer College maintaining favorable demand trends given its high reliance on student-generated revenues. Any material shift in enrollment could impact the rating.

BALANCE SHEET PRESERVATION: A material shift in Pitzer College's liquid resources relative to operating expenses or leverage could impact the rating.

ADDITIONAL DEBT: Pitzer College's issuance of additional debt, beyond $4 million available for draws under its current bank facility, without commensurate increase in available liquid resources, could trigger a rating downgrade.

CREDIT PROFILE

Founded in 1963, Pitzer College is an independent, undergraduate, liberal arts college in Claremont, California. The college is part of The Claremont Colleges (TCC), a group of seven affiliated but independently managed institutions of higher education that collaborate on various academic and administrative initiatives.

HIGH SELECTIVITY SUPPORTS STRONG DEMAND

Pitzer has a small operating size, with total headcount enrollment in fall 2014 of 1,076 students. Headcount in fall 2015 is expected to reach 1,084 students and not grow much beyond current levels according to management due to limited physical plant and student housing capacity. All students are required to live on campus with limited exceptions. Pitzer plans to maintain its current size to maintain its high quality of program offerings.

Admission to Pitzer is highly selective, and continues to improve with just 12.9% of fall 2015 freshmen applicants gaining acceptance. The college's matriculation rate is expected to increase to approximately 48.5% in fall 2015 supporting its very strong demand characteristics.

HEALTHY OPERATIONS

Pitzer's operating margin, inclusive of the endowment distribution, is consistently positive (averaging 4.9% for fiscal 2010 to fiscal 2014) but improved to 7.7% in fiscal 2014, from 4.2% in fiscal 2013, which Fitch views as healthy for the rating category.

After substantial market losses in fiscal 2009, Pitzer's management prudently implemented a multi-year endowment spending reduction plan in fiscal 2010, which fully suspended endowment spending and imposed three years of graduated increases. After setting a spending rate of 3.13% in fiscal 2012 under its old spending policy, typically ranging from 4.5% to 5% of a 12-quarter average market value, Pitzer returned to full spending in fiscal 2013 under its new spending policy, at a rate of 4.35% which remained stable in fiscal 2014. The new spending policy ranges from 4.0% to 4.5% of a 16-quarter average market value which is expected to smooth ups and downs of the investment cycle.

HEALTHY LIQUID RESOURCES

Historically, annual surpluses, along with market gains, enabled the college to augment available funds (calculated by Fitch as cash and investments not permanently restricted). At the end of fiscal 2014, available funds increased a significant 15.7% to $119.8 million from 2013 levels, with strong coverage of operating expenses and total debt of 214.3% and 147.5%, respectively. About 74% of Pitzer's investment portfolio was liquid within 30 days at March 31, 2015. Fitch continues to view Pitzer's liquidity as strong supporting the 'A' category rating.

HIGH DEBT BURDEN

The college's debt burden remains high, with MADS of nearly $6.9 million representing about 11.5% of fiscal 2014 unrestricted operating revenues. Adequate coverage of about 1.8x helps partly mitigates this high debt burden. Favorably, Pitzer expects to finance additional, near-term capital projects, including new academic facilities, without increasing leverage; except for $4 million remaining under a First Republic Bank credit line. Project costs will additionally be funded from internal resources and cash received from the college's fundraising efforts.

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=989868

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989868

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Nancy Faingar Moore, +1-212-908-0725
Director
or
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
Secondary Analyst
Tipper Austin, +1-212-908-0199
Associate Director
or
Committee Chairperson
Maura McGuigan, +1-212-908-0591
Senior Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Nancy Faingar Moore, +1-212-908-0725
Director
or
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
Secondary Analyst
Tipper Austin, +1-212-908-0199
Associate Director
or
Committee Chairperson
Maura McGuigan, +1-212-908-0591
Senior Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com