NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the rating on approximately $130.2 million of fixed-rate revenue bonds, series 2007A and 2012, issued by the Pennsylvania Higher Educational Facilities Authority on behalf of La Salle University (La Salle, or the university) to 'BBB' from 'BBB+'.
The Rating Outlook has been revised to Stable from Negative.
SECURITY
Revenue bonds are an unsecured, general obligation of the university.
KEY RATING DRIVERS
ENROLLMENT PRESSURES DRIVE DOWNGRADE: The downgrade of La Salle's rating to 'BBB' from 'BBB+' reflects falling enrollment levels for a fourth consecutive year in fall 2015 coupled with a climbing tuition discount rate, which will negatively impact at least fiscal 2016 student-generated revenues. Although fall 2016 freshmen enrollment should improve, total enrollment will remain lower over the near-term.
WEAKENED OPERATING PERFORMANCE: The rating downgrade for the university also reflects weaker operations in fiscal 2015 and projected weaker operating results on a GAAP basis in fiscal 2016 that are more consistent with the 'BBB' rating.
TRANSITIONING MANAGEMENT AND STRATEGY: The installation of La Salle's new president in conjunction with the change in senior leadership across all eight administrative departments during fiscal 2016 have led to a new strategic plan with aggressive student recruitment efforts. Implementation of the new strategic plan appears feasible, but the results remain uncertain.
ADEQUATE BALANCE SHEET CUSHION: La Salle's financial cushion remains modest for the rating level, but balance sheet resources continued to grow in fiscal year 2015and should provide the university with a sufficient cushion relative to operating expenses and outstanding debt.
MANAGEABLE LEVERAGE POSITION: La Salle's moderately high pro forma debt burden is partially offset by its consistent generation of sound debt service coverage from net operating income. The high debt burden is additionally mitigated by its entirely fixed-rate debt structure and current lack of major capital or additional borrowing needs.
RATING SENSITIVITIES
ENROLLMENT STABILITY DRIVES MARGIN: Successful implementation of La Salle University's new strategic plan, which leads to stronger enrollment trends and sustained positive operating performance beyond fiscal 2016, could lead to consideration of a higher rating over time. Conversely, continued weakening enrollment trends and student-generated revenues, which primarily drive the institution's operating performance, could result in further rating pressure.
ADDITIONAL LEVERAGE: The incurrence of additional debt without a commensurate increase in available financial resources, while not presently anticipated, could adversely pressure La Salle's rating given the university's light balance sheet cushion.
CREDIT PROFILE
La Salle University, founded in 1863 by the Christian Brothers, is located on a 133-acre campus 10 miles north of Center City Philadelphia. In addition to its main campus, the university also has a campus in Newtown, PA (Bucks County), which opened in 1997, and a campus in Plymouth Meeting, PA (Montgomery County), which opened in 2008. La Salle is comprised of three schools: Arts and Sciences, Business, and Nursing and Health Sciences. La Salle is accredited by the Middle States Commission on Higher Education.
NEW LEADERSHIP AND STRATEGIC PLANNING
La Salle's new President, Dr. Colleen M. Hanycz, began her tenure in July 2015. Since then, the university's senior leadership team (including Vice Presidents for Academic Affairs, Finance and Administration, Advancement, and Enrollment) has changed and is working on implementing reforms.
The anticipated strategic plan will outline management's vision to grow enrollment, streamline academic programs, reduce expenses, and broaden La Salle's market position. Moreover, Fitch will monitor senior leadership's success in executing its strategic plan going forward.
DECLINING ENROLLMENT DRIVES WEAKER OPERATIONS
La Salle's revenue base is highly concentrated in student-generated tuition, fees and auxiliary receipts, underscoring its need to successfully meet enrollment goals to balance operations. These revenues typically comprise over 80% of La Salle's total unrestricted operating revenue (84.2% in fiscal 2015). This revenue concentration is not atypical of private colleges and universities, yet it underscores La Salle's need to carefully manage enrollment levels and maintain stable student demand. Fitch is concerned that net tuition and fees for the university remained flat in fiscal 2015 over the prior year.
Headcount (5,683) and full-time equivalent (FTE) enrollment (4,720) declined 9% and 8%, respectively in fall 2015. On an FTE-basis, fall 2016 is projected to be even lower than fall 2015 for both undergraduates and graduates, although total freshmen are projected to grow by almost 100 students based on initial deposits and accounting for expected additional applications. Management did also report that nursing deposits at May 2016 are up over the prior year.
While tuition and fees have steadily increased since fall 2010 (up 3.3% to just over $41,000 in fall 2015), La Salle's tuition discounting rate also continues to increase (44.4% in fall 2015, on a university-wide level). Fitch is concerned how the undergraduate tuition freeze for fall 2016 may affect fiscal 2017 operations. Fitch, however, does positively view La Salle retaining consulting services to conduct a study on tuition pricing in order to boost net tuition revenues.
Fitch continues to view La Salle's low selectivity (73% acceptance rate for fall 2015) and low yield (16.2% for fall 2014) as a credit concern, although not uncharacteristic of a regional private institution, especially one operating in the highly competitive service area. Management reports that they are taking various steps to boost enrollment, including the introduction of new Division I athletic programs and a comprehensive branding campaign.
La Salle's adjusted operating margin (including endowment distributions) has been positive for each of the past five fiscal years (2011 - 2015), averaging a sound 2.6% over this time period, including a 1.5% in fiscal 2015.
Fiscal 2016 is expected to be weaker due to decreased fall 2015 enrollment and an inability to offset expenses associated with La Salle's strategic plan. Management underscored that they have taken efforts to curb expenses, such as implementing salary freezes, layoffs, and voluntary buyouts. Still, any continued margin deterioration in fiscal 2017, which would likely affect debt service coverage levels, may result in further downward rating pressure.
IMPROVING BALANCE SHEET CUSHION
La Salle's financial cushion remains modest for the rating level, although balance sheet resources have continued to grow since fiscal 2012. Available funds (AF), or cash and investments not permanently restricted, totaled $92.3 million as of May 31, 2015, up from $84.2 million one year prior. AF covered fiscal 2015 operating expenses ($129.7 million) and pro forma debt ($148.4 million) by 71.2% and 62.2%, respectively.
However, given its modest financial cushion, any deterioration to the university's resource base could lead to further rating pressure. A sustained track record of just breakeven (or negative) performance, coupled with La Salle's existing balance sheet cushion, is more reflective of a 'BBB' rather than a 'BBB+' rating.
HIGH BUT MANAGEABLE DEBT BURDEN
La Salle's debt burden remains moderately high but manageable. Pro forma maximum annual debt service (MADS) occurs in fiscal 2041 at approximately $9 million, consuming a moderately high 7.0% of fiscal 2015 unrestricted operating revenues. Partially offsetting the debt burden is La Salle's fixed-rate, level debt service and the university's consistent ability to generate adequate debt service coverage from net operating income. Over the past five fiscal years, MADS coverage has averaged 1.7x, with fiscal 2015 at 1.6x.
No additional bond financing is planned at this time, and management reports that any potential new projects including renovation, new construction and expansions are expected to be funded only by fundraising and current resources. However, any additional debt incurrence without a commensurate increase in resources or revenues could pressure the rating.
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=1005263
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005263
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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