OREANDA-NEWS. November 18, 2015. Fitch Ratings affirms the 'A' rating on the following series of bonds issued by the Washington Higher Education Facilities Authority (WHEFA) on behalf of Gonzaga University (Gonzaga, or the university):

--\\$33 million revenue bonds series 2013A;
--\\$20 million taxable revenue bonds series 2013B.

The Rating Outlook is Stable.

SECURITY

The series 2013 bonds are a general obligation secured by unrestricted gross revenues of the university. Additional bondholder protections include a negative pledge on the university's core campus.

KEY RATING DRIVERS

CONSISTENT OPERATING PERFORMANCE: Gonzaga continues to generate solid operating margins, both before and after the inclusion of the endowment draw; reflecting management's conservative financial planning and budgeting practices. The margin was down in fiscal 2015, due in large part to graduate enrollment declines; however, management was able to make budgetary adjustments and achieved another surplus.

MIXED ENROLLMENT PICTURE: Gonzaga's undergraduate enrollment levels have remained relatively stable over the past few years, and fall 2015 brought in the largest incoming freshmen class in its history. However, like many institutions, the level of graduate students continues to show some instability.

SOUND FINANCIAL CUSHION: Gonzaga has a sound financial cushion, with available funds providing adequate coverage of operating expenses and debt. The university's financial resources have grown significantly in recent years as a result of investment gains, annual operating surpluses and growing fundraising success.

MANAGEABLE, BUT HIGH DEBT BURDEN: Gonzaga's debt burden remains high, at 7.5%, but concern is partially mitigated by a history of good debt service coverage.

RATING SENSITIVITIES

ENROLLMENT STABILITY: Being a tuition dependent institution, Gonzaga University's operating profile is highly sensitive to enrollment shifts. An inability to effectively manage periodic shifts or material declines in enrollment may yield negative rating pressure.

ADDITIONAL LEVERAGE: A material increase in additional indebtedness, without a commensurate increase in available resources, could pressure the university's financial profile and lead to negative rating pressure. The rating assumes that philanthropy will largely support much of the future capital projects Gonzaga anticipates undertaking over the next few years.

CREDIT PROFILE

Gonzaga 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 US and is located on a 131-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 a host of online master's degree programs. Gonzaga is accredited by the Northwest Commission on Colleges and Universities, and it sponsors nine NCAA Division I sports teams, for both men and women in the West Coast Conference.

Fall 2015 headcount enrollment totaled 7,491, a decline of approximately 1.52% since fall 2013. This decline is attributed to a drop in graduate programs, as the undergraduate headcount was up 3%, or 145 students, during the period.

Graduate program offerings are somewhat diverse and management believes this diversity may help offset declines in one program with growth in another. Demand for the law school and graduate education programs remains weaker; while graduate nursing is stable. Going forward, the expectation is that there will be more niche graduate programs offered, that will attempt to leverage current faculty.

Freshmen applications declined approximately 6% for fall 2015; however, more importantly, the number of matriculants increased 28% over the prior year, reaching a record level of 1,338. At the same time, the freshmen to sophomore retention rate remains healthy, at a strong 95% in fall 2015. Management attributes the improving demand metrics to more targeted marketing, clearly detailing the value proposition of a Gonzaga education and providing potential students with their financial aid packages earlier in the cycle.

Positive Operations Offset Revenue Concentration

Relative enrollment stability and conservative budgeting practices on the part of management have supported Gonzaga's track record of positive operating margins. Over the past five years, operating margins (including the endowment spending) have averaged 5.2%, with the generation of a 3% margin in fiscal 2015. Fitch views positively Gonzaga's ability to generated positive margins, even without the endowment spending, that averaged 3.5% over the past five fiscal years.

According to management, year-to-date, Gonzaga is on track with the fiscal 2016 budget and expects to end the year positively, with a margin in the 3% to 5% range. Fitch believes this projection is reasonable, as the incoming freshmen class exceeded projections and Gonzaga historically budgets for and produces a surplus.

The university's revenue base, like many private institutions, is concentrated in student-generated revenues (tuition, fees and auxiliaries), accounting for 84.4% of total unrestricted operating revenues in fiscal 2015. Concern over the concentration is somewhat offset by relatively stable enrollment and the university's ability to continuously generate positive operations.

Sound Financial Cushion

In fiscal 2015, Gonzaga's available funds, defined by Fitch as cash and investments not permanently restricted, reached \\$175.1 million, reflecting 1.7% increase over the prior year. This resource level is equal to approximately 90% of operating expenses (\\$194.9 million) and 98.2% of debt (\\$178.3 million).

The university's investment policy is fairly conservative and includes guidelines for operating funds with a focus on liquidity, and endowment funds with a longer term horizon. The long-term investment pool, which is largely comprised of donor restricted endowment assets, had a June 30, 2015 market value of \\$202.6 million. The largest components of the pool included domestic equity (23%), international equity (21%), fixed income (20%) and alternative investments (36%).

Augmenting financial resources and supporting Gonzaga's future capital plans, in October 2015 the university announced its Gonzaga Will campaign. This campaign has a goal of \\$250 million and has already raised \\$183 million. In addition to funding construction, it is estimated that approximately \\$100 million of proceeds will be used to fund scholarships.

High, but Manageable Debt Burden

Gonzaga's MADS debt burden is high at 7.5%; however, it has declined from 7.8% since the prior year. The overall debt profile is largely fixed, with less than 6% issued in variable rate mode. At the present time there are no immediate debt plans, therefore it is expected that this burden will continue to decline.

Gonzaga has two interest rate swaps outstanding, for a total notional amount of \\$48.9 million. The combined derivative liability was \\$7.5 million as of May 31, 2015, but there was no posting requirement on the part of the university. Given Gonzaga's financial cushion and track record of operating surpluses, Fitch views the level of variable rate debt outstanding and derivative exposure manageable for the university.