OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on the series 2015B and 2013 educational facilities revenue bonds issued by the Health and Educational Facilities Authority of the State of Missouri (MHEFA) on behalf of the St. Louis College of Pharmacy (StLCOP). Fitch does not rate the college's 2014 or 2015A bonds.

The Rating Outlook is revised to Negative from Stable.

SECURITY

The bonds are a secured general obligation of the college, issued on parity with approximately $121 million debt.

KEY RATING DRIVERS

ENROLLMENT RELIANCE: The Negative Outlook is driven by enrollment pressures. StLCOP has a narrow academic program, small and largely regional student base, high tuition dependency and exposure to industry cycles. Pharmacy demand nationally has been down in recent years, and that is reflected in weaker college demand indicators. Overall full time enrollment (FTE) is stable but well below projections.

SOLID BALANCE SHEET: The 'BBB+' rating is supported by StLCOP's solid balance sheet for the rating category and slimmer but still positive operating results. Fitch views StLCOP's narrow academic niche, high student revenue concentration and competitive admissions environment as a continuing challenge.

SLIMER OPERATING MARGINS: Operating margins were modestly positive in fiscal 2015 and are projected to be positive for the fiscal year ended June 30, 2016. However, fiscal 2016 results include greater use of endowment than StLCOP has seen historically; Fitch considers the approximately 5% draw to be sustainable.

HIGH DEBT LEVERAGE: Leverage increased significantly with recent issuance of debt for strategic plans. The fiscal 2015 MADS burden is a very high 21%, and fiscal 2016 is expected to be similar. Fitch considers this debt burden a limiting credit factor and notes that while the college has no additional debt plans, it has less financial flexibility now that it is using its endowment draw.

RATING SENSITIVITIES

WEAKER COVERAGE METRICS: A significant weakening of St. Louis College of Pharmacy's maximum annual debt service (MADS) coverage or operating margins would trigger a negative rating action. Given StLCOP's high debt burden, generation of positive operating margins, a sustainable endowment draw and strong expense controls will be necessary to maintain the rating.

HIGHER DEBT LEVERAGE: StLCOP has no additional debt capacity at the current rating. Issuance of additional debt, which is not expected, would result in a rating downgrade.

STABLE ENROLLMENT: Failure to maintain and modestly grow enrollment and grow net tuition revenue will likely pressure operating results and would negatively pressure the rating.

CREDIT PROFILE

StLCOP is a private, non-profit college with an attractive, compact campus located in St. Louis, Mo., near the Washington University School of Medicine, Barnes Jewish Hospital and St. Louis Children's Hospital. It was founded in 1864 as a stand-alone pharmacy school, and principally offers a professional Doctor of Pharmacy (Pharm. D.) degree. StLCOP accepts students as freshmen, and in years two, three, and four of the academic program.

The capital component of the college's 2020 strategic plan is nearing completion. The plan also involved moving from a six-year to a seven-year Pharm. D. program, which started with the entering fall 2014 class. The seven-year plan provides students a Bachelor of Science degree in health sciences after four years. StLCOP has seen some enrollment pressure from the plan, in combination with less national demand for pharmacy graduates and fewer high school graduates in Illinois and Missouri, the college's primary market. Management reports that supply and demand for new pharmacists in the Midwest is balanced, and well over 90% of the college's graduates are employed in their field within three months of graduation.

Overall FTE has been stable since fall 2014 with modest growth. It was 1,356 in fall 2014, and 1,375 in fall 2016. However, enrollment is significantly less than strategic projections (fall 2016 FTE was projected to be about 1,480, eventually growing to 1,600 by fall 2020). As a result, the college increased undergraduate and professional transfer admissions, and adjusted its operating budget by using an endowment draw. In prior years, almost all StLCOP students entered as freshmen. Fall 2016 is the third admissions cycle at which entering students begin a seven-year academic term. For fall 2017 admissions, management reports that it will offer six-, and seven-year pharmacy program options to students, and is considering a five-year option.

For fall 2016, new students included 126 first-time freshmen (FTF), well down from around 250 in fall 2012 and 200 in fall 2014. The difference was made up with 52 undergraduate transfer students and 75 professional/four-year transfer students. This resulted in an entering class of about 253, down from 271 in fall 2015, but still stable total FTE for fiscal 2017. For comparison, the fall 2014 entering class was 255 (FTF plus transfers), fall 2013 was 278, and fall 2012 was 298.

Student quality remains strong. The average entering freshman ACT score is consistently 27 (the national average is about 21).

CAPITAL MASTER PLAN

StLCOP is nearing completion of most of its strategic initiatives and campus master plan. The phase I academic building opened in fall 2015. The phase II student services building is on time and on budget, with substantial completion expected in early 2017. This latter phase includes housing (234 new units to be available in fall 2017), dining and recreation facilities. When the new housing opens, a freshman and sophomore residency requirement will become effective; in fall 2018, the requirement will extend to juniors. The college has no new debt plans.

POSITIVE BUT SLIMMER MARGINS

STLCOP has a history of positive operating margins, although those margins have narrowed in recent years. Audited operating margins were modestly positive in fiscal 2015 (1.6%), following negative 1.1% in fiscal 2014 and a more typical 2.6% in fiscal 2013. Between fiscal years 2008 and 2015, margins averaged 4.6%. Fitch considers prior margins very conservative, as the college chose not to use an available endowment draw.

Results for the fiscal year ending June 30, 2015 (the most current audit) were $656,000, including a modest but larger than usual endowment draw ($1.9 million or about a 1.5% draw). In fiscal 2015, if the full endowment draw (about $7 million) is included in operating revenues, the operating margin would have been about 12%.

Fiscal 2016 results are not yet available, but management projects a positive but modest operating surplus in combination with using an approximate 5% endowment draw (around $7 million of endowment market value). Fitch considers that draw sustainable and expects StLCOP will continue budgeting endowment draws going forward. Management reports that most faculty and staff hires to support the 2020 strategic plan were completed by fiscal 2016. The college had not utilized significant endowment draws in the past, essentially 'banking' revenue flexibility; it is now using that budget flexibility to support strategic initiatives. Fitch typically considers a 5%-6% endowment draw sustainable.

Management projections for fiscal 2017 are balanced, and expected to be similar to fiscal 2016 with continued use of an endowment draw. Fitch views consistently positive operating results, supported by stable or modestly growing enrollment, sustainable endowment draws, consistent growth in net tuition revenue and strong expense controls, to be important credit factors for the college. These only partially offset the college's high debt burden, concentrated revenue base, narrow academic niche, and competitive enrollment market.

Student generated revenue is typically around 90% of StLCOP's operating revenue, which is not unusual for peer institutions but results in significant enrollment reliance.

HIGH DEBT LEVERAGE

Outstanding debt is about $121 million, and MADS is $8.8 million. Not included in this amount is a $6.0 million balance on one of StLCOP's bank loans that may be drawn down later in fiscal 2017. This results in a very high 20% of fiscal 2015 operating revenues. No additional debt is expected, and Fitch assumes the debt burden will gradually moderate.

All debt is fixed rate with no bullet maturities; there is no debt service reserve fund. Debt service increases modestly to MADS of about $8.8 million in 2024, remains at that level until 2028, then falls to about $8 million. The $12.1 million series 2014 bonds and the $6.5 million series 2015A bonds are fixed rate private bank placements. Management reports that no bank 'put' is allowed at 10-year fixed-rate interest reset points and that debt terms are consistent with parity debt.

Pro forma MADS coverage was only 1.0x in fiscal 2015; after Fitch adjusted fiscal 2015 net income for the unused endowment draw, MADS coverage was closer to 1.5x. Management projects fiscal 2016 MADS coverage to be around 1.2x, which Fitch considers consistent with the rating category.

STRONG BALANCE SHEET

Available funds (defined by Fitch as cash and investments not permanently restricted) was $143 million at June 30, 2015, about the same as the prior year. This represented 111% of debt and a very strong 345% of operating revenues. These ratios remain strong for the rating category.

StLCOP had a $146 million endowment at June 30, 2015, most of which was unrestricted. At June 30, 2016, the endowment is about $138 million (unaudited). Fitch considers the college's investment asset allocation somewhat aggressive given the tuition dependence, high debt leverage and debt burden and narrow academic offerings. The asset allocation for investments at Aug. 31, 2016 (about $141 million, unaudited) was about 62% equities and fixed income and 38% private equities, real assets and hedge funds.