OREANDA-NEWS. July 01, 2015. Fitch Ratings has affirmed the 'A' rating on \\$140.8 million of Pennsylvania Higher Educational Facilities Authority revenues bonds, series 2010A and 2013B, issued on behalf of Saint Joseph's University (SJU).

The Rating Outlook is Stable.

SECURITY

SJU's obligations under a loan agreement with the issuer are secured by a lien on unrestricted university revenues, including tuition and related fees. There is no debt service reserve fund.

KEY RATING DRIVERS

IMPROVING FINANCIAL POSITION: SJU is a private, liberal arts university located in the competitive Pennsylvania marketplace. A return to positive enrollment growth and ongoing expense management has helped the university improve its financial position over the past two years.

POSITIVE OPERATING MARGINS: Operating margins remain solidly positive (3.3% in fiscal 2014) and have improved since the fiscal 2012 low (2.5%). However, margins are less than half of recent historical averages. Net tuition and fees representing more than 85% of total operating revenues were little changed in fiscal years 2012-2014, reflecting some degree of pricing and recruitment pressures.

REBOUNDING ENROLLMENT: Gradually rebounding enrollment trends, including the largest incoming classes in university history, support SJU's revenue base. Low matriculation rates of near 20% reflect the competitive environment, but retention rates upwards of 90% are strong and improving.

LIMITED FINANCIAL CUSHION: Available funds provide sufficient but comparably limited financial cushion relative to similarly-rated private institutions, at approximately 1x operating expenses and long-term debt. The ample headroom under bank direct placement covenants mitigates the risks of acceleration and associated draws on available funds that could negatively affect the rating.

IMPROVING DEBT PROFILE: A history of operating surpluses partially mitigates a high, but gradually improving, pro forma MADS burden of 8.9%. SJU currently has no additional debt plans, and recent variable rate debt refinancings eliminate the associated liquidity risks.

RATING SENSITIVITIES

REVENUE PRESSURES: Stalled revenue growth from flat net tuition and fee revenues without offsetting expense management could lead to negative rating action. Tighter operating margins could begin to pressure Saint Joseph's University's comparably limited financial cushion for the rating level.

STALLED ENROLLMENT GROWTH: A reversal of recently improved enrollment trends that ultimately pressure operating margins could lead to negative rating action.

CREDIT PROFILE

SJU is a private, comprehensive institution founded by the Society of Jesus in 1851. The university, located on a 103-acre campus in western Philadelphia, is comprised of three colleges: the College of Arts and Sciences, the Erivan K. Haub School of Business, and the College of Professional and Liberal Studies.

Dr. Mark Reed will begin his tenure as SJU President on July 1, 2015. Dr. Reed assumes the role after financial pressures caused tensions between the administration and faculty over the past couple of years. Certain other senior leadership positions remain in transition, but SJU appears to be making financial strides in support of the current rating level.

POSITIVE OPERATING MARGINS

SJU's operating margins remain positive and healthy. However, regional competitive pressures limited net tuition and fee revenue growth to less than 1% annually in fiscal years 2012-2014; institutionally-funded financial aid increased by nearly 20% during the same period. As is typical of many private colleges and universities, student fees represent a substantial 85% of SJU's total revenue base.

Ongoing expense management has slowed spending growth in support of operating margins. Nonetheless, operating margins are less than half of the recent historical averages at an average of 2.8% annually since fiscal 2012, including 3.3% in fiscal 2014.

Fiscal 2015 interim results through April 2015 suggest continued improvement toward a 4.3% operating margin. Total operating revenues increased by 4.3% over the same period the prior year, including 5.3% growth in net tuition and fee revenues; an increase in tuition rates and enrollment offset an increase in financial aid. In addition, total operating expenses decreased by 1.4%.

IMPROVING FORECASTS

SJU leadership, which uses multi-year forecasting tools to manage budget and financial planning, is developing other sources of revenues through the fiscal 2018 planning period to support the university's financial position. Projected undergraduate net tuition revenues remain stable. However, non-traditional tuition and increased gift revenues propel growth. Fiscal years 2016-2018 projected margins remain in the 3.5%-4.5% range.

The maintenance of healthy operating margins through a combination of net tuition and fee revenue growth, the development of additional revenue sources, and continued expense management will be a key consideration of future rating actions.

REBOUNDING ENROLLMENT

Enrollment trends have begun to slowly improve in a positive sign for the university's financial position. FTE enrollment increased by 1.8% in fall 2013 and again by 1.1% in fall 2014 to 6,712, after having fallen by nearly 3% in fall 2012. The fall 2014 incoming class was the largest in SJU's history and preliminary indications for fall 2015 remain positive.

Balancing increased financial aid to bolster enrollment with generating a reasonable operating margin will continue to be a challenge and key rating consideration.

LIMITED FINANCIAL CUSHION

SJU's available funds balances (defined as cash and investments not permanently restricted) provide adequate but comparably limited financial cushion for the rating category. This underscores the importance of strengthening the university's operating margins to buttress its balance sheet resources.

Available funds have grown by 17% since fiscal 2012 to \\$206 million in fiscal 2014 and interim fiscal 2015 results suggest an additional 10% gain. The fiscal 2014 ratios of available funds to operating expenses and long-term debt equaled 96% and 87%, respectively. Investment returns have strengthened available funds, despite narrower operating margins.

A rarely-used, \\$25 million annual credit facility with PNC Bank through Jan. 31, 2016 provides added liquidity.

IMPROVING DEBT PROFILE

Capital projects over the past 10 years position SJU's infrastructure for the medium term. Management reports that no major projects or associated debt financings are planned, and annual capital budgets funded from operating cash flows approximate the depreciation expense. Consequently, SJU's moderately high debt burden should continue to improve as existing debt amortizes.

SJU refinanced three series of outstanding variable rate debt/notes in 2015 with two hedged, variable rate bank direct placements. The bank placements provided savings and eliminated put risk and associated liquidity requirements.

The university comfortably exceeds related financial covenants that largely mirror those of the still outstanding, rated debt. Cure periods under the events of default provide less leeway than with the rated debt. However, the placements do not cross-default to the rated debt, and the university's existing liquidity approximates its total outstanding debt.

Consistent operating surpluses somewhat mitigate SJU's moderately high MADS burden of 8.9%, which is nevertheless down from 10.5% in fiscal 2010. Moreover, MADS is not until 2032. Fiscal 2014 MADS coverage remained thin but stable at 1.7x, and annual debt service coverage was much stronger at 2.5x.

Privatized Student Housing

A separate corporation financed two fully occupied and financially self-supporting housing facilities in 2003 that are located near campus. Related debt service is non-recourse to SJU, although the university funds all operating expenses before reimbursement. Fitch does not include the related debt (about \\$35 million) in its SJU debt calculations.