NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a 'BBB-' rating to the approximately $37.8 million series 2013A revenue refunding bonds issued by Pennsylvania Higher Educational Facilities Authority, on behalf of Holy Family University (HFU).
The bonds are expected to sell via negotiated sale during the week of Aug. 12, 2013. Bond proceeds will be used to currently refund HFU's outstanding variable rate demand bonds (series 2002A&B, series 2004 and series 2008), and to pay costs of issuance.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by and payable from unrestricted university revenues. The bonds will have no debt service reserve.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'BBB-' rating reflects HFU's generally balanced operating results, which serves to offset liquidity levels that are adequate for the rating category. Counterbalancing factors include HFU's moderately high debt burden, revenue base concentrated in student revenues, and challenging enrollment environment driven by the competitive landscape in which it operates.
ENROLLMENT PRESSURES PERSIST: HFU's enrollment has declined, largely reflected in its part-time and graduate populations. While this trend can be seen nationwide, it is exacerbated at HFU by the university's highly competitive geographical market. HFU's full-time undergraduate enrollment has been mostly stable but dipped in fall 2012 primarily because of declining enrollment in the school of education. Management is relying to a great extent on institutionally funded financial aid to bring the freshman discount rate to a more competitive level, which accounts for the decrease in net tuition revenues projected for fiscal 2013.
GENERALLY BALANCED OPERATIONS: Operating margins have historically been break-even to positive, but in fiscal 2012 HFU had a deficit of 2% due largely to enrollment shifts. However, fiscal 2013 year-end projections indicate a return to balanced operations in line with prior years. HFU operations are projected to be positive for budgeted fiscal 2014.
PRO-ACTIVE MANAGEMENT TEAM: HFU's management team has successfully led the university through a transformation in fiscal 2013 aimed at resetting HFU's focus, cost structure and operations to position itself for growth. Beginning in fiscal 2013, HFU made changes to its leadership and organizational structure and has implemented significant cost efficiencies and reductions that are expected to impact operations favorably in fiscal 2014 and beyond.
ABOVE AVERAGE BUT MODERATING DEBT BURDEN: The pro forma maximum annual debt service (MADS) debt burden is moderately high at 8.4% based on projected fiscal 2013 unrestricted operating revenues. This calculation of debt burden includes a bank loan currently refinancing HFU outstanding variable rate mortgage debt and hedges. There are no new debt plans at this time, which should serve the institution well as it reduces this burden over time.
RATING SENSITIVITIES
BALANCE SHEET PRESSURES: While unexpected, further weakening of already low available funds levels relative to operations and debt may pressure the rating.
FURTHER MARGIN EROSION: Failure to achieve enrollment targets, leading to declining net tuition revenue and significantly weaker operating margins than envisioned in the university's financial plans, may yield negative rating pressures.
CREDIT PROFILE
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. In 2002, the State Department of Education designated it a university. 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 is regionally accredited by the Middle States Commission on Higher Education and offers undergraduate and graduate degrees in nursing and allied health, education, business, arts and sciences, as well as accelerated degree programs, with 81 full-time faculty serving a diverse student body of approximately 3,100 students. Undergraduate students typically represent approximately 70% of total headcount enrollment, and most attend full-time and 17% currently live on campus. A larger proportion of graduate students attend on a part-time basis. HFU's current board consists of 26 active members (maximum allowable is 30 members).
RETURN TO BALANCED OPERATIONS
Fiscal 2012 ended with an operating deficit of 2% in fiscal 2012, largely due to a reduction in the part-time and graduate student population and to greater institutionally funded financial aid requirements to make the freshman discount rate more competitive. Projections for fiscal 2013 are favorable, reflecting a slightly stronger but still negative operating margin of 0.2%, with tuition revenues down due to declining enrollment in the school of education. Historically, HFU has generated slim but positive margins (averaging 1.1% from 2008-2012), except for the 5.3% surplus realized in 2009, which was the result of both higher enrollment levels in fall 2008 and a higher level of net asset released from restrictions that could be used for operations.
In fiscal 2013, management decided to take specific actions to deal with the changing operating environment. HFU hired a financial consultant to take on the role of Interim Finance Director, upon the formers retirement. The university executed a comprehensive reorganization, process and cost structure review and laid out a plan mid-year. Included in this plan were actions to reorganize staff, cut costs, eliminate positions and academic programs for undersubscribed majors, refinance debt, and sell underutilized assets to improve liquidity. At the same time, HFU revised its strategic multi-year plan for the fiscal 2014-2017 timeframe to manage budget and financial planning, while focusing on growth and development. HFU will launch new offerings such as a second degree nursing program and business related degrees in the next 12 months to encourage future enrollment.
Fitch views favorably the institution's desire to revamp operations. However, it is too soon to determine whether the desired results will be achieved.
FISCAL PLAN FOR TRANSFORMATION
Under the plan, operations are projected to be positive for budgeted fiscal 2014 and beyond, with closer to 1-2% surpluses. MADS coverage has averaged 1.3x for the last five fiscal years, including fiscal 2012, and is projected at 1.3x in fiscal 2013, which Fitch considers to be an adequate coverage level for a 'BBB-' rating given their lack of financial flexibility.
Fitch views HFU's pro-active management as a strength which is expected to provide a solid foundation for future operations. HFU's president is approaching retirement but has committed to lead HFU through the transformation. Fitch recognizes that the President has been a driving force behind the transformation and will continue to monitor these changes as they occur.
HIGH RELIANCE ON TUITION REVENUES
As is the case with many private colleges and universities, HFU has a concentrated revenue base, with fiscal 2012 student-generated revenues accounting for a substantial 89% of operating revenues. As a result, management's ability to successfully meet enrollment goals is a key driver in achieving balanced operations. The university reports increased focus on marketing, branding and admissions initiatives to build its application pool, to increase penetration in its traditional regional market, and to grow its core curriculum to critical mass, while discontinuing undersubscribed programs.
Tuition discounting is managed as part of the budget, and while the rate increased to about 27.2% for fiscal 2012 from 20.8% in fiscal 2008, a credit strength is that HFU has historically grown net tuition revenue overall. Projections for fiscal 2013, however, show net tuition revenue is about 5.2% (or, $2 million) lower than fiscal 2012, partly due to a decline in enrollment in the school of education. HFU's 2014 budget and extended financial plan reflects another 3% decrease in net tuition revenues in fiscal 2014 before stabilizing in fiscal 2015 and increasing thereafter. Fitch views the decline in net tuition revenues as a credit weakness that will need to be monitored going forward.
ADEQUATE BALANCE SHEET RESOURCES
HFU's balance sheet ratios are slim but adequate for the 'BBB' category. Available funds (Fitch defines as cash and investments not permanently restricted) totaled $16.5 million at fiscal year-end 2013, which is equal to 35.5% of operating expenses and 35.1% of pro forma debt. Projections for fiscal 2013 indicate similar ratios.
Long-term investments at fiscal year-end 2012 totaled $14.96 million, with $2.4 million classified as true endowment, $8.8 million as quasi-endowment and $3.7 million classified as other investment assets. In addition, the university had $5.3 million of unrestricted cash and equivalents, which was available for operating liquidity and planned capital projects. Unrestricted cash partly used to fund library upgrades in recent years account for the decline from the prior year. At May 31, 2013, long-term investments increased to $16.2 million, with quasi-endowment ($9.9 million), true endowment ($3.2 million) and other ($3.1 million). The asset allocation is fairly typical, with exposure to fixed income, equity and alternative asset classes. Exposure to less-liquid, alternative investments was about 10.5% as of May 31, versus the policy target of 11%.
ABOVE AVERAGE BUT MANAGEABLE DEBT BURDEN
Post issuance, HFU's total debt is about $46 million, which restructures HFU's debt portfolio to a conservative fixed-rate debt structure, taking out 100% of variable rate demand debt and hedges. HFU is not adding any additional debt and not extending maturities. This change to a fixed portfolio is viewed favorably by Fitch, as it provides greater budgetary predictability.
Fitch's total debt calculation includes an $8.6 million bank facility with PNC Bank, which is being issued simultaneously with the current bond financing to refinance two existing mortgages, fund an underwater hedge on its existing variable rate mortgage and provide bank line capacity for contingencies. The existing mortgage notes are on a residence facility and dormitory adjacent to campus. The university reports no other future debt plans at this time and expects to continue to fund future capital projects from gifts or from internal cash-flow.
The pro forma MADS debt burden remains moderately high at 8.4% based on projected fiscal 2013 operating revenues. However, the debt burden was even higher in prior years (over 9.5% in fiscal 2010), and is expected to gradually moderate due to regularly scheduled principal payments and HFU's lack of additional debt plans which Fitch views favorably.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria', dated May 10, 2013.
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049
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