Fitch Rates DePaul University, IL's Series 2016A Revs 'A'; Outlook Stable
The bonds are expected to sell via negotiation the week of Aug. 22, 2016. Bond proceeds will refund the university's series 2011A bonds. The university expects to pay issuance expenses.
Fitch has also affirmed various revenue bonds issued by either DePaul University (DePaul) or the Illinois Finance Authority (IFA) on behalf of DePaul, as listed at the end of this release.
The Rating Outlook is Stable.
The bonds are an unsecured general obligation of DePaul.
KEY RATING DRIVERS
STABLE FINANCIAL METRICS: The 'A' rating reflects DePaul's history of positive operations, sound balance sheet resources for the rating category, and active expense management. However, enrollment for graduate, law and undergraduate transfer students has declined in recent years, which is a concern.
PROACTIVE MANAGEMENT: DePaul has effectively managed expenses to match enrollment fluctuations and operates in a competitive regional market. Fiscal 2015 results generated a strong 7.8% operating margin. Management expects another operating surplus for the fiscal year ending June 30, 2016.
MANAGEABLE DEBT BURDEN: DePaul's pro forma maximum annual debt service (MADS) burden is about 6.2% of fiscal 2015 operating revenues. This moderately high MADS burden is mitigated largely by rapid principal amortization, a conservative fixed rate debt structure and no near-term new debt plans.
BALANCE SHEET RESERVES: DePaul University's high reliance on student revenue requires strong management of both enrollment and expenses to maintain positive operating results. Solid balance sheet reserves provide some operating cushion, even with the fiscal 2016 draw-down for the strategic McCormick Place Events Center project.
OPERATING PERFORMANCE: Declines in DePaul's operating performance and debt service coverage would negatively pressure the rating. At this time the university's ability to cover unpaid state scholarship grants to low-income students demonstrates operating flexibility.
Founded in 1898, DePaul is a private non-profit institution, and one of the largest Catholic universities in the U. S. DePaul has large campuses in Chicago's Loop business district and the Lincoln Park neighborhood of Chicago. There are also two leased suburban satellite campuses.
DePaul is a co-educational institution offering extensive undergraduate and graduate degree programs. In fall 2015, about 76% of the 20,607 full-time equivalent (FTE) students were undergraduates. Large professional and graduate programs include law, business, computing and digital media, nursing, and education. Management reports that about 10% of credit hours are delivered on-line. The university's student draw is largely regional, with new freshman undergraduate students coming primarily from Illinois and the Chicago metropolitan area (about 59%).
Management projects stable or slightly lower enrollment for fall 2016 (fiscal 2017), a continuing trend in recent years. Total FTE enrollment for fall 2015 (fiscal 2016) stabilized at 20,607, essentially the same as fall 2014. This followed several years with declines primarily in graduate and law enrollment as well as undergraduate transfer students. Management reports that enrollment fluctuations were anticipated, and remained within budget. Fall 2015 law school head-count was 778, down from 1,076 in fall 2010.
Graduate FTE enrollment in fall 2015 was up slightly from fall 2014, as the university has seen some uptick in its computing and digital media and education programs. Other graduate programs, such as business and health sciences, have seen greater stability. Fall 2015 FTE graduate enrollment was 5,041 (including law), up slightly from 5,003 in fall 2014, but down from 5,851 in fall 2010. For fall 2016, enrollment expectations are similar.
Full-time undergraduate students remain an enrollment strength. These students represent a substantial 58% of total headcount, and have grown a modest 3.1% in recent years (from 13,250 in fall 2010 to 13,664 in fall 2015). Part-time undergraduates, however, who include a sizable commuter and transfer population, dipped to 2,297 in fall 2015. There is significant competition for transfer students in the Chicago metropolitan market.
OPERATING MARGINS OFFSET TUITION DEPENDENCY
DePaul has consistently generated positive operating margins, and another surplus is projected for the fiscal year ending June 30, 2016. The operating surplus for fiscal 2015 was $43.8 million, a solid 7.8% margin. This margin was primarily driven by expense controls and the effect of the early retirement program, as net tuition revenue was essentially flat. Expense controls continue.
DePaul's fiscal 2017 budget is balanced using conservative assumptions. As in fiscal 2016, the university has committed to cover any Illinois (Fitch rated 'BBB+' Issuer Default Rating/Rating Watch Negative) scholarship funds (MAP grants) awarded to low-income students enrolled at DePaul. This amount is typically about $20 million annually. Fitch considers DePaul's ability to cover these scholarship grants and still generate a positive net margin a strength.
Given DePaul's high student fee dependency (91% of fiscal 2015 unrestricted operating revenues), slowly stabilizing enrollment, and operation in a highly competitive regional market, Fitch views maintenance of positive operating margins as critical in supporting the 'A' rating.
The university's balance sheet remains solid for the rating category, even after the fiscal 2016 payment toward its share of the McCormick Place Events Center. Available funds (AF), defined by Fitch as unrestricted cash and investments, was $618 million at the end of fiscal 2015, equal to a healthy 119% of operating expenses and about 155% of pro forma debt. When fiscal 2015 AF is adjusted for the $82.5 million events center contribution, which was made in cash from reserves during fiscal 2016, the AF-to-debt ratio remains sound for the rating category at about 134%.
DePaul has a history of designating reserves for strategic capital projects, such as the events center, a practice that Fitch views as conservative and proactive. At the end of fiscal 2016, institutional reserves were about $92 million, down from $131 million, but reflected the fiscal 2016 events center payment. These and other reserves not specifically board-designated are included in Fitch's AF valuation.
MANAGEABLE DEBT AND CAPITAL PLANS
Post-issuance debt is about $399 million, including parity revenue bonds and various mortgage notes and leases. The university's debt structure is fixed-rate with declining debt service. Fitch views this structure favorably as it provides expense flexibility.
DePaul issued $68.7 million series 2016 tax-exempt bonds to construct a new School of Music building, and used internal reserves to fund the events center facility, which is under construction; management reports it is on time and on budget. It is owned by the Metropolitan Pier and Exposition Authority, which operates the McCormick Place convention center south of the Chicago Loop business district. DePaul has naming and scheduling rights and long-term access to seating, but limited operating liabilities. The facility has access to mass transportation convenient to students at both the Lincoln Park and Chicago Loop campuses.
Pro forma MADS (about $35 million) was 6.2% of fiscal 2015 operating revenues. Fitch considers this moderate to moderately high, but manageable due to the declining debt amortization structure. With no additional debt plans for the next four to five years, Fitch expects DePaul to moderate its MADS burden over time.
Pro forma MADS coverage for DePaul was solid in fiscal 2015 at 2.9x. MADS coverage for fiscal 2016, based on university projections, is also expected to be positive.
Fitch affirms the following outstanding ratings for bonds issued by IFA on behalf of DePaul University:
--$15.09 million DePaul University revenue refunding bonds series 2004A at 'A';
--$35.37 million DePaul University revenue bonds series 2008 at 'A';
--$115 million DePaul University revenue refunding bonds series 2011A at 'A';
--$39.75 million DePaul University revenue refunding bonds series 2011B at 'A';
--$27.215 million DePaul University revenue refunding bonds series 2013 at 'A'.
--$68.735 million DePaul University revenue bonds series 2016 at 'A'.
Fitch has also affirmed the 'A' rating for $18.260 million DePaul University taxable revenue refunding bonds, series 2015, issued by DePaul.