Fitch Rates Xavier University, OH's Series 2015C Revenue Bonds 'A-'; Outlook Stable
In addition, Fitch has affirmed the university's \$99.5 million outstanding revenue bonds at 'A-'.
The Rating Outlook is Stable.
SECURITY
The bonds are a general obligation of the university, secured by all legally available and unencumbered funds of the university, issued on parity with the university's outstanding debt.
KEY RATING DRIVERS
POSITIVE OPERATING MARGIN: Overall, Xavier is demonstrating progress towards reaching goals set forth in its strategic financial plan. Xavier, with its growing financial resources, maintained an operating surplus in fiscal 2014 (1.5%) and expects positive results in fiscal 2015.
WEAKENED ENROLLMENT POSITION: Stable undergraduate enrollment and an established market position counterbalance persistent challenges in graduate enrollment.
GROWING FINANCIAL AID NEEDS: A competitive operating environment drove institutional aid to its highest level in fiscal 2014. In turn, net tuition revenue has been essentially flat since fiscal 2012. The ability to grow net tuition revenue is a driver of long-term financial strength.
PROACTIVE MANAGEMENT TEAM: Xavier actively manages tuition revenue shortfalls, in part, through significant expense reductions. Management plans to continue to mitigate the financial impact of decreasing graduate enrollment and higher student aid requirements with continued cost cutting efforts.
RATING SENSITIVITIES
FLAT NET TUTION REVENUE: Further weakening or flat net tuition and fees that ultimately impact operating margins could contribute to negative rating action. Fitch will monitor whether the university improves its discounting rate over time.
MARGIN STABILITY: Fitch expects gradual operating improvement to continue in fiscal 2015, leading to continued operating surplus and growth in financial resources over the next several years. Sustained positive operating margins would likely result in positive rating action.
ADDITIONAL LEVERAGE: Incurrence of additional debt, without a commensurate increase in available financial resources or sustained operating improvement, could stress the university's financial cushion and lead to negative rating action.
CREDIT PROFILE
Xavier, founded in 1831, is a private, co-educational Jesuit institution located in Cincinnati, Ohio. The university has successfully improved and expanded its 190-acre campus throughout the past five years, including the opening of the Hoff Academic Quad (which contains two new major academic buildings and a new central utility plant) in fall 2010, a new student housing and dining complex in fall 2011, and renovating Alter Hall (its primary classroom building) to be reopened in fall 2015.
CONTINUED FINANCIAL STABILITY
Xavier ended fiscal 2014 with an operating surplus of \$2.2 million (or margin of 1.3%) on an adjusted basis of \$2.4 million, including a modest amount of endowment spending. This level compares favorably over prior year results. This favorable outcome is a result of management continuing to make necessary expense adjustments.
Approximately 8% of non-faculty positions in 2013 were eliminated, with some effects being realized in fiscal 2014 (tempered by separation agreements) with more likely realization in fiscal 2015. Going forward, Xavier's longer-term strategy is to resume revenue growth via changes to recruitment and retention strategies, new academic programs, a redesign of the core curriculum, a redesign of the MBA program, and the planned establishment of a more robust marketing and branding function at the executive level.
Fitch will monitor Xavier's ability to gradually improve its operating margin (achieved thus far through cost-saving measures) by growing student-generated revenues. The inability to generate surplus operating margins that could drive growth in balance sheet resources could lead to a ratings downgrade.
Having increased the overall discounting rate to 38.3% in fiscal 2014 from 36.5% in fiscal 2013, Xavier acknowledges the issue of steady net tuition and the struggles of incorporating a diverse, need-based student body. The university continues to balance cutting the discount rate at the expense of losing a significant student population.
IMPROVED FINANCIAL CUSHION
Xavier's balance sheet is stable and improving. Available funds (defined by Fitch as cash and investments not permanently restricted) increased 23.4% in fiscal 2014 to \$181.5 million from \$147.1 million in fiscal 2013. As a result, available funds represent a reasonable financial cushion (111.8% of fiscal 2014 operating expenses and 92.4% of total outstanding debt) which is adequate for Fitch's 'A-' rating. Fitch has adjusted the university's available funds to exclude contributions receivable and student loan funds from total permanently restricted net assets.
Fitch will continue to monitor liquidity ratios going forward to ensure that levels are maintained consistent with the 'A-' rating level. Future operating surpluses and fundraising success to offset the use of liquid resources for proposed capital projects and renovations is critical to the rating.
VULNERABILITY TO ENROLLMENT SHIFTS
The university's reliance on student-generated revenues (with tuition, fees, and auxiliary revenues accounting for 79% of revenues in fiscal 2014) is not unusual for private colleges, but makes the university susceptible to changes in enrollment from year to year, necessitating close monitoring of demand statistics and enrollment trends. Increasing undergraduate full-time enrollment and growing competitive pressures have increased reliance on institutional aid.
Overall demand is stabilizing. Xavier's undergraduate enrollment headcount remained relatively steady in Fall 2014, after a 2.8% dip in Fall 2013. The university indicates that Fall 2014 utilized more targeted outreach implemented since installation of regional recruiters, whose efforts have resulted in 26% of new student enrollment. Favorably, a relatively steady undergraduate enrollment in Fall 2014 (4,633 students) curbed a significant 5.6% drop in graduate enrollment headcount. As seen nationally by Fitch, Xavier's declining graduate enrollment is mostly attributable to lower demand for the graduate education program.
While Xavier has hit or exceeded its budgeted enrollment numbers for full-time undergraduates, the university had missed its targets for graduate students and part-time undergraduates. Management assures that they have made necessary adjustments, including making the choice to budget much more conservatively for fiscal 2015. The missed revenues from enrollment are being offset with cost management and revenue overachievement in other areas, including auxiliary enterprises.
HIGH BUT MANAGEABLE DEBT BURDEN
Improved operations in fiscal 2014 provide for adequate 1.9x coverage of pro forma maximum annual debt service (MADS). Pro forma MADS burden is high at 8.1% but manageable given Xavier's lack of additional debt financing plans for at least the next three years. With the new issuance of series 2015, unhedged variable-rate debt through May 2015 would account for 1.2% of Xavier's outstanding long-term debt, hedged variable-rate debt would account for 37.2% of the university's outstanding long-term debt, and fixed-rate debt would account for 61.6% of Xavier's outstanding long-term debt. After May 2015, all outstanding long-term debt would be fixed or synthetically-fixed with swaps (i.e. hedged variable rate).
Fitch believes the university's adjusted debt profile continues to present credit risk. Swap collateral requirements are monitored closely, and Xavier has not had to post any collateral to date. With the new issuance, fixing a portion of its variable rate debt should eliminate not only interest rate risk, but put risk on the debt, as well as renewal and pricing risk.
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