OREANDA-NEWS. Fitch Ratings affirms the rating on the following revenue bonds issued by the Hale Center Education Facilities Corporation and the City of Barrow, Alaska on behalf of Wayland Baptist University (WBU):

--$28,975,000 outstanding revenue refunding bonds (Hale Center Education Facilities Corporation), series 2010 at 'A-';

--$4,255,000 outstanding revenue bonds (Hale Center Education Facilities Corporation), series 2012 at 'A-';

--$2,300,000 outstanding revenue refunding bonds (Barrow, AK), series 2012 at 'A-'.

The Rating Outlook is revised to Negative from Stable.

SECURITY
The revenue bonds are a general obligation of the university.

KEY RATING DRIVERS

OUTLOOK REVISION: The Negative Outlook reflects the university's third consecutive year of declining enrollment resulting in weakening operating results over the past three fiscal years.

PRESSURED FINANCIAL OPERATIONS: After posting positive surplus operations for fiscals 2011 through 2014, WBU recorded a negative 4.4% operating margin in fiscal 2015 driven by a steady decline in net tuition and fee revenues. Management has taken steps to improve enrollment through various initiatives, which could stem enrollment declines.

SOUND LIQUIDITY LEVELS: The university's financial cushion remains sound and to some extent mitigates the negative operating margin for fiscal 2015. Liquidity ratios are on par with the 'A-' peer medians relative to expenses and better relative to debt.

DIVERSE STUDENT MIX: Unlike many private universities, WBU's student-related revenues, its primary source of funding support, are generated from a diverse mix of traditional-age and non-traditional/continuing education students.

MANAGEABLE DEBT BURDEN: Debt burden is moderately high but manageable at 6.1% of fiscal 2015 unrestricted revenues. Historically, maximum annual debt service (MADS) coverage has been solid but dropped to 0.8x in fiscal 2015.

RATING SENSITIVITIES

ENROLLMENT VOLATILITY: Continued declines in enrollment, which would pressure student-related revenues, could negatively impact Wayland Baptist University's rating.

OPERATING STABILITY: Inability of Wayland Baptist University to achieve break-even to positive GAAP operating results in fiscal 2016 could lead to downward rating action.

CREDIT PROFILE

Founded in 1908, WBU is a church-related, coeducational institution affiliated with the Baptist General Convention of Texas (BGCT). The university serves primarily traditional students at its Plainview, TX campus and non-traditional enrollees, including military and civilian personnel, across a geographically diverse network of 13 external campuses and over 50 teaching sites.

Wayland serves a diversified enrollment base with 1,500 (28.6%) traditional students (18-24-year-old residential students) at its home campus in Plainview and 3,749 non-traditional, non-residential students at the external/satellite campuses. These students are a mix between active military and civilian students (15.8% and 84.1%, respectively).

ENROLLMENT VOLATILITY

During fall 2015, the university's total (unduplicated) FTE decreased by 3.2% to 3,701, compared to the prior year's 3,824. This followed declines of 8.7% and 11.9% in fall 2014 and 2013, respectively. In terms of credit hours, fall 2015 showed 38,886 credit hours, a 3.1% decrease over fall 2014. Management believes enrollment losses are due in part to increased competition from community colleges.

For fall 2015, active duty military enrollment was 15.9% lower compared to the prior fiscal year. While active duty military headcount as a percentage of total headcount (12.4%) is much lower than civilian overall, some external campuses are located in areas where the local economy is influenced by the military.

Fitch will continue to monitor military force restructuring and its impact on WBU's enrollment environment; however, we are comfortable that Wayland has managed to successfully adapt to the five separate base realignment and closure cycles during its 40-year history serving the military.

PRESSURED FINANCIAL OPERATIONS

Unlike many private universities, WBU's student-related revenues, its primary source of funding at 81%, are generated from a diverse mix of traditional age and non-traditional/continuing education students.

After achieving positive-to-modest operating results from fiscal 2011 to 2014, the university's operating margin declined to negative 4.4% in fiscal 2015. This was due primarily to a 7% decline in net tuition and fees, which followed a 6.7% decline in fiscal 2014.

Historically, WBU has largely been able to reduce variable expenses in line with revenue reductions which include keeping open positions vacant and requiring less adjunct faculty to serve fewer class sections. Favorably, Wayland has a very large part-time faculty and leased facilities, providing some expenditure flexibility. For fiscal 2015, operating expenses declined by 3.5% from the prior year.

Despite a downturn in enrollment for fall 2015, management expects to achieve breakeven-to-positive GAAP results for fiscal 2016 due to continued expense management. On a budgetary basis, for the six months ending Dec. 31, 2015, revenues were up 1.1% and expenses were down 2.9%, with revenues exceeding budget by about $1 million. Unaudited GAAP numbers for the same period report revenues over expenses of approximately $1.1 million.

Fitch will continue to closely monitor WBU's ability to regain a sound fiscal position and generate positive results in fiscal 2016 in line with management's expectation; otherwise, there could be negative rating implications.

SOUND LIQUIDITY LEVELS

Available funds (defined as cash and investments not permanently restricted) in fiscal 2015 totaled $66.3 million, up from $61.2 million over the prior year, providing a sound 109% of fiscal 2015 expenses and 154% of the university's outstanding debt, both above fiscal 2014 levels. When adjusted to exclude potentially illiquid alternative investments (primarily real estate), the ratios decline to more modest, though still adequate levels of 57% and 80%, respectively. The majority of WBU's real estate holdings represent farm and ranch properties, as well as oil and gas mineral interests, which are periodically reappraised. These properties produce on-going income that represents approximately 5.6% of fiscal 2015 total unrestricted revenues. While the university has an unusually high amount (for the rating level) of investments in illiquid assets, board members are familiar with and have a good understanding of the oil and gas industries.

The university's endowment, as of June 30, 2015, totaled $88.6 million, an increase of 11.9% over the prior year. Approximately 46% of the university's investments are managed by the Baptist Foundation of Texas (BFT), which consist of relatively conservative asset allocations. The remaining investments are managed by the university. The university managed portfolio (totaling $47.2 million as of June 30, 2015) is composed of real estate (95%) and certificates of deposits (5%).

Based on the recommendation of WBU's Investment Committee, the Board of Trustees recently approved a new primary investment manager with the majority of assets scheduled to be transferred over the next six months. A portion of the assets will remain at BFT due to donor restrictions. Management reports they are not contemplating any change in investment strategy but expenses are anticipated to be lower.

DISCIPLINED MANAGEMENT TEAM

Management has been prudent with external site expansion, vetting potential sites and determining operational and financial feasibility prior to opening new locations. The university generally leases external sites during start-up and ramp-up phases, and maintains the ability to exit leases at any of its geographically diverse external campuses without significant cost, and to add new leased facilities, as necessary, to grow teaching sites. This provides the university the flexibility needed to manage volatile enrollment in various markets where there is a large military presence.

MANAGEABLE DEBT BURDEN
WBU's debt burden is moderately high but manageable at 6.1%. MADS coverage has historically been solid, ranging from 3.1x in fiscal 2012 to 1.7x in fiscal 2014. However, coverage dropped to 0.8x in fiscal 2015. With no plans to issue additional debt, the debt burden is expected to moderate.