Fitch Affirms University of St. Thomas, TX Revs at 'BBB-'; Outlook to Negative
OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB-' rating on approximately $4.1 million of Wallis Higher Education Facilities Corporation tax exempt and taxable education revenue bonds issued on behalf of the University of St. Thomas (UST).
The Rating Outlook has been revised to Negative from Stable.
The bonds are a general obligation of the university.
KEY RATING DRIVERS
PRESSURED OPERATING PROFILE: The Negative Outlook reflects Fitch's expectation of ongoing negative GAAP-basis operations, including endowment support. Mixed enrollment trends and constrained net tuition revenue will continue to pressure the budget. Fitch considers a trend of negative GAAP-based operations a speculative grade characteristic that could threaten coverage and financial resources over time.
MIXED ENROLLMENT TRENDS: UST's undergraduate enrollment has grown moderately, although competition and high discounting constrain revenue growth. Declines in graduate enrollment, especially education, have offset undergraduate gains. UST's high tuition dependence and small size make the budget more sensitive to shifts in enrollment.
ADEQUATE BALANCE SHEET RESOURCES: UST's current balance sheet resources and recent fundraising success provide adequate cushion in line with expectations for the rating category and help to mitigate some operating stress.
MANAGEABLE DEBT BURDEN: UST's maximum annual debt service (MADS) burden is high when including a balloon maturity in 2022 on a commercial real estate loan. Excluding this loan, which is periodically refinanced, UST's debt burden is manageable. Debt service coverage has declined but remains adequate.
NEGATIVE PERFORMANCE: Consistently negative full-accrual operating margins resulting in declining reserves or failure to generate debt service coverage from operations would likely result in a downgrade over the next two years. However, incremental improvement in operating results could lead to stabilization of the rating.
ADDITIONAL DEBT: Additional debt, beyond a currently contemplated bridge financing, could negatively pressure the rating without a commensurate increase in financial resources.
Founded in 1947 by the Basilian Fathers, UST is the only Catholic Liberal Arts University in Houston and is located in Houston's Museum District, near the Galleria and Texas Medical Center. The university is accredited by the Southern Association of Colleges and Universities (SACS), which affirmed its accreditation in 2015 for a full 10-year term.
FLAT NET TUITION PRESSURES OPERATIONS
UTS's financial performance remains pressured by mixed enrollment trends and flat net tuition revenue. Fiscal 2015 performance improved slightly over the prior year but remained negative on a full-accrual basis. The fiscal 2015 operating margin was -2.8%, including endowment support. This compares to a negative (-3.7%) in fiscal 2014 following positive results since fiscal 2010. Operations are expected to remain pressured, as mixed enrollment trends and competitive pricing pressures have resulted in flat net tuition revenue since fiscal 2013.
UST has generated positive operating cash flow and acceptable debt service coverage despite negative GAAP margins in fiscal 2014 and 2015. Management expects breakeven budgetary but continued GAAP-basis deficits in fiscal 2016, as the budget does not include full depreciation expense. Fitch considers a trend of negative GAAP-based operating performance inconsistent with an investment grade rating, indicative of operating stress and limited financial flexibility.
MIXED ENROLLMENT TRENDS
UST's total enrollment is generally stable, but with mixed underlying trends. The undergraduate segment is growing moderately, with headcount of 1,805 in fall 2015, up from 1,609 in fall 2011. Steady freshman and transfer matriculation in addition to improving student retention have driven growth. However, pricing pressures and high discounting in the university's competitive region and market segment constrain net tuition growth.
Graduate trends have been weak, offsetting undergraduate gains. Graduate FTE enrollment has fallen by nearly a quarter to 745 in fall 2015 driven largely by losses in graduate education programs. UST has changed course offerings to align with market demands and local credentialing requirements, and management expects some stabilization in spring 2015. Overall, UST's high tuition dependence (77% of operating revenues) and small size make it financially sensitive to relatively small fluctuations in enrollment.
ADEQUATE BALANCE SHEET RESOURCES
UST's balance sheet resources have improved over time and provide some financial cushion in line with expectations for the rating category. Available funds (AF, defined as cash and investments not permanently restricted) of $25.8 million at June 30, 2015 covered fiscal 2015 operating expenses ($65 million) by an adequate 40% and debt ($28 million) by a solid 91%.
In addition, recent fundraising has improved the endowment and funded capital projects. Endowment value at June 30, 2015 totaled $86.6 million and, while mostly permanently restricted ($70.7 million, excluded from Fitch's AF calculation), provides operating support through a standard 5% spending policy. Fitch's AF metric also excludes donor-restricted cash for capital projects related to the capital campaign, which raised the full $48 million of pledges toward the first phase of a new science and nursing building. Because these funds are excluded, related capital construction over the next years should not cause a decline in AF.
MANAGEABLE DEBT BURDEN
UST's maximum annual debt service (MADS) burden is quite high at 13.9%, when including a $6 million balloon maturity on a commercial real estate loan. The loan is secured by commercial property purchased in 2007 and the university has never needed to subsidize the property's cash flows to meet debt service obligations. The loan was refinanced in advance of maturity in late 2015 (UST also paid down extra principal) and now matures in 2022.
Excluding the real estate loan, UST's debt burden is more manageable with adjusted MADS of $3.3 million consuming a moderately high 5.3% of fiscal 2015 operating revenues. As a result of weaker operations, coverage of adjusted MADS has declined from 2.1x in fiscal 2013 to 1.2x in fiscal 2014 and 1.4x in fiscal 2015.
UST intends to raise the full amount for current capital plans from donors, and there are no plans for additional long-term debt at this time. However, management is considering bridge financing collateralized by campaign pledges to fund near-term construction costs for the new science building in advance of pledged receipts. While the campaign raised the full amount of the building in pledges, receipts are expected over the next 3 years. Management's strategy is to use short-term bridge financing (likely $6 million to $11 million) at relatively low rates to preserve internal liquidity. Fitch will review the arrangement when finalized but expects the structure to be manageable for UST. Including the highest contemplated loan amount ($11 million) would lower the ratio of AF to debt to about 65%, still adequate for the rating level.