OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to the \\$28.8 million series 2015B 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).

The bonds are expected to sell via negotiation during the week of Oct. 12. Bond proceeds and an \\$11 million college equity contribution will finance phase II of the campus master plan, principally a seven-story student center with recreation, dining, housing and related facilities.

In addition, Fitch affirms its 'BBB+' rating on the \\$73.4 million outstanding series 2013 educational facilities revenue bonds issued by MHEFA. Fitch does not rate the college's 2014 bonds or the \\$12.5 million concurrently issued 2015A bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are a secured general obligation of the college, issued on parity with approximately \\$98 million outstanding debt. None of StLCOP's debt has a debt service reserve fund.

KEY RATING DRIVERS

HISTORICALLY STABLE OPERATIONS: The 'BBB+' rating is supported by StLCOP's solid balance sheet and historically stable enrollment. Fitch views StLCOP's narrow academic niche and high student revenue concentration as a continuing challenge.

HIGH DEBT LEVERAGE: Post issuance debt leverage increases significantly, consistent with long-term strategic plans, producing a very high 21% pro forma MADS burden based on fiscal 2015 operating revenues. Fitch considers this debt burden a limiting credit factor, only partially mitigated by no additional debt plans.

SLIMER OPERATING MARGINS: Operating margins were modestly positive in fiscal 2015 after being slightly negative in fiscal 2014 due to new faculty hires and accelerated depreciation expense. Fiscal 2015 results include modest use of endowment draw, a trend projected to continue. When margins are adjusted for unused endowment draws, pro forma MADS coverage remained positive.

ENROLLMENT RELIANCE: StLCOP's concentrated academic program, small and largely regional student base, and high tuition dependency exposes it to industry cycles. FTE enrollment has grown over time, but demand indicators for the Pharm.D program are less robust than in prior years (a national trend). Fall 2014 and 2015 are the initial classes for the new seven-year academic cycle. Fitch expects StLCOP to meet its enrollment projections.

RATING SENSITIVITIES

WEAKER COVERAGE METRICS: A significant weakening of St. Louis College of Pharmacy's maximum annual debt service (MADS) coverage or operating margins as a result of a failure to meet enrollment projections or grow net tuition revenue would likely trigger a negative rating action. Given StLCOP's high debt burden, generation of solid operating margins, a sustainable endowment draw and strong expense controls will be important to maintain the current rating going forward.

HIGHER DEBT LEVERAGE: Although StLCOP's MADS burden should gradually moderate over time, the college has no additional debt capacity at the current rating level. Unexpected growth in StLCOP's already high MADS burden 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.

Admissions remain selective, and management reports it discourages students from applying who do not meet admissions standards. The average entering freshman ACT score is consistently a strong 27 (the national average is about 21).
Enrollment has grown modestly over time, although it is less than projections noted in the most recent strategic plan. Fall 2015 headcount is 1,389, up slightly from 1,366 in fall 2014 and 1,215 in fall 2010. Fall 2015 is the second admissions cycle at which entering students begin a seven-year academic term.

Both the fall 2014 and 2015 entering classes were somewhat smaller than projected, and total applications have declined somewhat in recent years. Overall, however, enrollment continues to support positive operations and remains within budget constraints. The fall 2015 entering class (freshman plus transfers) was 271, slightly larger than the fall 2014 class of 255. For comparison, the fall 2013 entering class was 278 and the fall 2012 class was 298. StLCOP is relying more on transfer students to fill its class in recent years, compared to a historical base of freshman admissions.

STRATEGIC PLAN AND CONSTRUCTION
These 2015 A&B bonds support StLCOP's strategic initiatives and proceeds will essentially complete the capital component for phase II of its campus master plan. The new phase I academic building opened in fall 2015 and management reports it was on time and on budget. Phase II involves construction of a new student services building, including housing, dining and recreation facilities. A small phase III component, principally landscaping, is expected to be funded from gifts in several years. Post issuance, the college has no new debt plans.

Proceeds from the series 2013 bonds funded \\$55 million of phase I capital projects, including a new six-story academic building with auditorium, library, faculty offices and laboratory space, demolition of an existing student center, and issuance expenses and capitalized interest.

The strategic plan involves moving from a six-year to a seven-year Pharm.D. program that provides students a BS in health sciences after four years. The seven-year Pharm.D program does not require a significant increase in the number of annual matriculating students. Students remain an additional year in the undergraduate portion of the program. About 20% of students - mainly freshmen and sophomores - presently live on campus. This number is expected to increase after phase II housing and dining facilities (232 new beds) are completed. At that time a freshman and sophomore residency requirement will come into effect.

SLIMMER BUT POSITIVE 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. In the past eight fiscal years (2008 - 2015), surpluses have averaged 4.6%. Fiscal 2014 operating results were the only negative during that time at a modest (\\$431,000), which management attributed to new faculty hires associated with the strategic plan and accelerated depreciation expense.

Fiscal 2015 results of \\$656,000 included a modest but larger than usual amount of endowment draw (roughly a 1.5% draw vis-a-vis the 5.5% policy amount). Management reports that most faculty and staff hires to support the strategic plan have been completed. In prior years, StLCOP used minimal endowment draw for operations, allowing growth in quasi endowment and providing future financial flexibility. Management expects to use more endowment draw for operations going forward, which while consistent with industry practice, reduces budgetary flexibility somewhat. In the college's financial projections, including fiscal 2016, endowment draws are projected at or close to the 5.5% draw formula. Fitch typically considers a 5%-6% endowment draw sustainable.

Fitch views StLCOP's historical operating results as somewhat understated compared to peer institutions, as StLCOP did not utilize much of its board-approved draw (it periodically budgets for a portion of it but typically does not use it). When the full fiscal 2015 draw (about \\$7 million) is included in audited operating revenues, the operating margin would have been a solid 16.4% for fiscal 2015 (and 13.7% for fiscal 2014).

Management projections for fiscal 2016 are balanced on a GAAP basis, including use of endowment draw. Fitch views consistently positive operating results, supported by stable enrollment, sustainable endowment draws, consistent growth in net tuition revenue and strong expense controls, to be important credit factors for the college. These partially offset the college's high debt burden, concentrated revenue base, narrow academic niche, and increasing student competition.

Student generated revenue is typically 90% of StLCOP's operating revenue, and while not unusual for peer institutions, this results in significant enrollment reliance. Positively, net tuition and fees have increased annually since at least fiscal year 2007.

HIGH DEBT LEVERAGE
Post issuance, outstanding parity debt is about \\$129 million, resulting in a pro forma MADS burden of \\$8.8 million. This is a very high 21% of fiscal 2015 operating revenues. While the debt burden is exceedingly high, Fitch believes StLCOP's operating performance and financial flexibility somewhat mitigate this concern. Since no additional debt is expected, Fitch assumes the debt burden will moderate over time.

Post issuance, all debt is fixed rate with an overall serial amortization. Debt service increases modestly to MADS of about \\$8.8 million in 2024, remains at that level until 2028, then fall to about \\$8 million. The \\$12.1 million 2014 bonds, and the \\$12.5 million concurrently issued 2015A bonds, are 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 the 2013 and 2015B bonds.

Pro forma MADS coverage was only 1.0x in fiscal 2015; after Fitch adjusted net income for the unused endowment draw, MADS coverage was adequate at 1.5x. Fitch views MADS coverage as consistent with the rating category at this time.

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 pro forma debt (\\$129 million) and a very strong 345% of operating revenues. Both of these ratios remain quite strong for the 'BBB' rating category.

StlCOP had a \\$146 million endowment at June 30, 2015, most of which was unrestricted. Fitch considers the asset allocation somewhat aggressive given the college's enrollment, capital plan, debt burden and narrow academic offerings. The allocation at fiscal year-end was approximately 43% equities, 13% fixed income, 11% real assets and real estate, and 33% alternative funds.