NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on approximately $34.3 million of fixed-rate revenue refunding bonds issued by Pennsylvania Higher Educational Facilities Authority, on behalf of Holy Family University (HFU).
The Rating Outlook has been revised to Negative from Stable.
Revenue bonds are secured by unrestricted university revenues. The bonds have no debt service reserve fund.
KEY RATING DRIVERS
PRESSURED OPERATING PROFILE: The Negative Outlook reflects ongoing challenges in growing revenue, continued performance under budget and aggressive fiscal 2017 targets that may be unattainable. Fiscal 2015 (June 30 year-end) performance was under budget and fiscal 2016 is projected to be significantly under budget and in line with fiscal 2015 performance despite improved enrollment in fall 2015.
MIXED ENROLLMENT TRENDS: HFU's mixed enrollment trends and constrained tuition revenue continue to pressure performance given HFU's high tuition dependency, limited pricing flexibility and small size.
ADEQUATE RESOURCES: HFU's current balance sheet resources provide an adequate cushion in line with the rating category. However, balance sheet resources may be pressured if HFU is unable to refinance a bullet maturity due in fiscal 2019.
HIGH DEBT BURDEN: HFU's maximum annual debt service (MADS) burden is high when including the bullet maturity on bank debt due in fiscal 2019, but average annual debt burden is moderately high and offset by sound coverage. HFU's debt structure is entirely fixed-rate, with no new debt currently planned.
MARGIN EROSION: Holy Family University's failure to achieve stabilization and growth in net tuition revenue, leading to improved operating margins, will yield negative rating pressure.
BALANCE SHEET PRESSURES: A weakening of Holy Family University's already low available funds level relative to operations and debt would pressure the rating.
HFU is a private, liberal arts institution originally founded in 1954 as a ministry of the Congregation of Sisters of the Holy Family of Nazareth, with its charter as a college approved by the state of Pennsylvania. HFU has three campuses located in Pennsylvania, with the main campus in Northeast Philadelphia, and the other two located in Bucks County (Newtown Township and Bensalem Township).
The university offers undergraduate and graduate degrees in nursing and allied health, education, business, arts and sciences, as well as accelerated degree programs, with 76 full-time faculty serving a diverse student body of approximately 2,712 students in fall 2015.
HFU's operating margin declined to break even (0.8%) on a full-accrual basis, from 4.2% in fiscal 2014, deviating from its five-year plan. Actual results continue to miss budgeted expectations but largely met projections presented to Fitch during the last review due to management's cost containment efforts.
HFU's operating pressures in recent years have been due to weakening enrollment and compounded by HFU's need to increase its institutionally funded financial aid. Management continues to rely on institutionally funded financial aid to bring the freshmen discount to a more competitive level, which accounts for the decrease in net tuition revenues in the past three fiscal years. Affordability concerns drive lower tuition rate increases in fiscal 2016 and fiscal 2017 which could further reduce this revenue source.
As is the case with many private colleges and universities, HFU has a concentrated revenue base, with student-generated revenues accounting for a substantial portion of operating revenues. As a result, management's ability to successfully meet enrollment goals is a key driver in improving financial performance. Fitch believes revenue and enrollment growth is necessary for long term viability.
Total headcount enrollment continued to miss budgeted targets by a slim 1% for fall 2015, despite modest growth of 2% to 2,712 students. Challenges were largely related to growth expectations for the part-time graduate and the accelerated MBA and master of education programs. Enrollment remains under pressure for fall 2016 due to a competitive operating environment, increased discounting by peers, and student concerns over high student debt and economic pressures.
HFU's fall 2016 enrollment plan targets growth to 2,802 students, which is 3% growth or 90 students over fall 2015. HFU expects undergraduate enrollment will be flat with some modest growth in graduate and accelerated programs due to the recently hired executive director of accelerated learning and HFU's newly established exclusive partnership with KTA Alliance (an organization that works closely with school districts).
According to management, fall 2016 undergraduate applications are up relative to same point prior year; but, acceptances are lagging primarily due to incomplete applications. Management is working to resolve this issue; meanwhile, deposits are essentially flat with prior year, which should improve once remedial actions on acceptances are completed.
Management projects 510 fall 2016 undergraduate deposits, which is generally flat relative to fall 2015. However, summer melt is an ongoing concern but HFU expects to maintain single digit melt (around 5%) which is lower than trend seen across regional private colleges according to HFU. HFU is improving touch-points with freshmen and ramped up orientation efforts for fall 2016.
The ability of senior leadership team to execute near-term strategies and enable HFU to meet budgeted enrollment in fall 2016, without eroding net tuition revenue, will be critical to maintaining the current rating. Irrespective of any decrease in enrollment, HFU will be expected to manage the impact to its operating budget and remain balanced. HFU is located in a very competitive market, which is an ongoing challenge.
Available funds (Fitch defines as cash and investments not permanently restricted) totaled $22.5 million at fiscal year-end 2015, which is equal to 56.8% of operating expenses and 55% of pro forma debt. These ratios are improved over last year and adequate for Fitch's 'BBB' category.
Long-term investments at fiscal year-end 2015 totaled $19.2 million, with $3.9 million classified as true endowment, $11.7 million as quasi-endowment and the remaining classified as other investment assets. In addition, the university had $8.5 million of unrestricted cash and equivalents, which was available for operating liquidity and planned capital projects. These levels are slightly improved over fiscal 2014.
HIGH DEBT BURDEN
HFU's debt portfolio is 100% fixed-rate after restructuring its variable-rate demand debt and terminating hedges with the series 2013 bond issue. HFU's MADS totals $7.05 million, including the $3.4 million bullet maturity due in 2019 under a bank facility with PNC Bank. The bank facility was issued to refinance mortgages and the underwater hedge and provide bank-line capacity for contingencies.
Including the bullet, debt burden consumes a high 17.6% of fiscal 2015 unrestricted operating revenues; however, based on average annual debt service (AADS), debt burden is a more moderate 7% and supported by sound AADS coverage of 2.0x. Management expects to be able to restructure the bullet payment prior to the due date and will provide more details closer to that date. The bonds have no debt service reserve fund which Fitch views negatively and is expected for this rating level.
Fitch believes financial leverage should be tempered over the next several years as debt amortizes given the front-loaded nature of the debt structure and the lack of additional debt issuance plans.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. College and University Rating Criteria (pub. 12 May 2014)
Dodd-Frank Rating Information Disclosure Form