OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to approximately $103 million The Corporation of Gonzaga University's (Gonzaga, or the university) revenue and refunding taxable bonds, series 2016A.

The bonds are expected to sell via negotiation during the week of Oct. 10, 2016. Bonds proceeds will be used to 1) redeem all of the following outstanding series of bonds: 2009A, 2010A, 2012A, and 2012B; 2) redeem a portion of 2009B bonds; 3) fund various capital improvements; 4) pay capitalized interest (if necessary); and 5) pay the costs of issuance.

In addition, Fitch affirms its 'A' rating on approximately $53 million of outstanding series 2013 A&B bonds, issued by Washington Higher Education Facilities Authority.

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of Gonzaga, secured by its unrestricted gross revenues.

KEY RATING DRIVERS

POSITIVE OPERATIONS: Gonzaga continues to generate consistently solid operating margins, reflective of management's conservative budgeting and planning practices.

MIXED ENROLLMENT PICTURE:

Total full-time equivalent enrollment has remained relatively stable over the past few years; however, there has been greater pressure on the graduate student enrollment, particularly at the law school. Overall, total headcount enrollment increased approximately 1% in fall 2016 over prior year.

SOUND FINANCIAL CUSHION:

Gonzaga continues to maintain a sufficient financial cushion, with available funds supporting operating expenses and debt. Additionally, Gonzaga's fundraising success has helped to somewhat offset greater debt issuance associated with significant campus improvements.

RATING SENSITIVITIES

ENROLLMENT STABILITY: Gonzaga University's operating performance is highly sensitive to enrollment shifts, given its significant tuition dependence. An inability to effectively manage enrollment fluctuations may lead to a negative rating action.

INCREASED LEVERAGE: A material increase in additional indebtedness, without a commensurate increase in available resources, would pressure the university's rating.

CREDIT PROFILE

Gonzaga University was founded in 1887 by the Society of Jesus (the Jesuits) and is affiliated with the Catholic Church. It is one of 28 Jesuit colleges and universities in the U. S. and is located on a 152-acre campus in Spokane, WA. Gonzaga offers 75 undergraduate programs, 26 master's degree programs, and maintains a campus in Florence, Italy for student exchange programs. It also operates several online master's degree programs. Gonzaga is accredited by the Northwest Commission on Colleges and Universities, and it sponsors NCAA Division I sports teams, for both men and women in the West Coast Conference.

Graduate program offerings are somewhat diverse, which may help offset declines in one program with growth in another. Gonzaga's law school enrollment has declined over the past few years, like many law schools throughout the country. Enrollment in fall 2016 is estimated at 312, down from 339 enrolled the prior year. The size of the law faculty has declined with the retirement of some faculty in addition to maintaining some unfilled positions, which has helped to counter some of the financial impact of the lower class size.

Overall, fall 2016 headcount enrollment totaled 7,548 (unofficial 10 day count), comparable to the fall 2015 enrollment of 7,491. Favorably, applications for fall 2016 grew about 9% over the prior year; and the matriculation was 25.9%, fairly comparable to the five year average of 24.8%.

In March 2016, Gonzaga entered into an agreement with the University of Washington School of Medicine (UW), whereby Gonzaga will provide faculty, student support services (student counseling, health services, etc.) and facilities to students in UW's School of Medicine. This program, known as University of Washington School of Medicine - Gonzaga University, will expand UW's Washington, Wyoming, Alaska, Montana and Idaho medical education program and will emphasize servicing rural and medically underserved areas.

The program's participants are UW students, but the medical students will be spending their first 18 months on Gonzaga's campus. Given UW's strong research platform, this relationship is expected to provide Gonzaga with research opportunities previously unavailable to its students. This agreement became effective for the fall 2016 entering class and there are approximately 100 total medical students receiving instruction at the university.

Capital Improvement Plan

Over the past 10 years, there have been a number of capital projects completed on campus. However, the Hemmingson University Center has probably made the biggest impact. The university center is a $60 million facility that was funded with the 2013 bonds and completed in July 2015, on time and on budget. This facility is the center of campus life, which among other things, contains club space, academic space, a pub, various retail establishments, space for large functions that may be leased out to the internal and external community for various functions, and the student dining area with six restaurant style dining "platforms".

The Stevens Center is a recently completed 72,000 square foot tennis and golf facility that was fully funded with gifts. Additionally, the Boone Avenue Retail Center is a mixed use parking/retail/office facility opened in 2013.

There are a few projects that will be constructed over the next few years; however, there are no additional debt plans associated with these facilities. The three facilities approved for future construction are the Woldson Performing Arts Center, the Jesuit Residence and the Center of Athletic Achievement.

Balance Sheet Supports Rating

Gonzaga's level of available funds (AF; Fitch defined as cash and investments not permanently restricted) reached approximately $181.3 million in fiscal 2016, an increase of approximately 3.5% over the prior year. This resource level is equal to approximately 87% of expenses and 102% of pro forma debt.

Gonzaga's endowment, which is largely permanently restricted and therefore not included in AF, provides the university with additional support. At July 31, 2016, the pooled endowment value was approximately $201.4 million. The target allocation of the pooled endowment fund hasn't changed in recent years, and is roughly 54% equities, 21% fixed income, 15% alternatives and 10% real estate. Like many endowments, the return for 2016 (measured as of June 30) was down - having generated a (2.2%) return vs. a 4% return in fiscal 2015. The endowment draw is based on a combination of the prior year's draw, inflation, and a rate in the range of 4%-5% 36-month rolling average.

Gonzaga's debt portfolio contains a number of bullet maturities. As currently anticipated, pro forma maximum annual debt service (MADS; $35 million) is expected to occur in 2046, inclusive of the bullet maturities. While this produces a high MADS debt burden of approximately 16%, MADS coverage is acceptable at 0.8X, given that level is based off of 2016 revenues. Annual coverage is much stronger, and was 1.7X in 2016.

Positive Financial Operations

Relative enrollment stability, in conjunction with management's conservative budgeting practices, supports Gonzaga's continued generation of positive margins. Budget practices include multi-year budgeting, the assumption of lower than actually anticipated enrollment, in addition to budgeting for renewal/replacement and an additional contingency. In fiscal 2016, the operating margin was 3.1%; comparable to the 3.0% generated the prior year.

Student generated revenues (tuition, fees and auxiliaries) account for approximately 84% of operating revenues; and therefore, a continued focus on enrollment management is essential for maintaining the rating.