OREANDA-NEWS. Fitch Ratings has downgraded approximately $84.6 million private college revenue refunding bonds, series 2015 issued by the Iowa Higher Education Loan Authority on behalf of Wartburg College (Wartburg or the college) to 'BB-' from 'BB'.

The Rating Outlook has been revised to Stable from Negative.

SECURITY

The series 2015 private college facility revenue bonds are a general obligation of the college, secured by a lien on revenues of the college and a mortgage on the core campus. Additionally, the bonds are supported by a debt service reserve fund equal to maximum annual debt service (MADS).

KEY RATING DRIVERS

DOWNGRADE to 'BB-': Wartburg's rating downgrade to 'BB-' reflects the college's small headcount which continues to decline and fails to achieve preliminary budgeted estimates. The college's high reliance on student revenue for operations makes it very vulnerable to enrollment shifts. Wartburg's history of generally negative and volatile operating margins, as calculated by Fitch, is expected to be further impacted by lower than expected net tuition and fee revenues, high tuition discounting coupled with limited ability to raise revenue/cut expenses in the current year which supports the downgrade at this time.

STABLE OUTLOOK: The revision to Stable Outlook reflects relative stability in the college's financial cushion, which is a strength when compared to the rating category, and the lack of additional debt plans which alleviates some concern over the high debt burden. Though Wartburg's balance sheet strength provides some cushion to implement an enrollment recovery plan over the next year, inability to execute a plan that would generate operating improvement would trigger further rating action.

FINANCIAL FLEXIBILITY LIMITED: Wartburg is dependent on student fees to support operations. This reliance is exacerbated by a high discount rate which limits growth in net tuition revenues.

DECLINING ENROLLMENT TREND: Wartburg has experienced four consecutive years of declining full-time equivalent (FTE) enrollment. Competition continues to challenge the college which has driven up the institutional aid requirement over time.

RATING SENSITIVITIES

OPERATING PERFORMANCE: Wartburg College's rating is sensitive to modest shifts in enrollment and resultant impacts to operating performance. Failure to improve enrollment in fall 2016 and operating performance in fiscal 2017 could negatively pressure the rating further.

RESOURCE STABILITY: Wartburg College's inability to sustain and build on vastly improved resources could negatively pressure the rating.

CREDIT PROFILE

Wartburg College, established in 1852 as a liberal arts college of the Evangelical Lutheran Church in America, is located in Waverly, IA and serves predominantly (about 66%) of in-state undergraduate students.

NEGATIVE-TRENDING ENROLLMENT

Headcount declined by 7.5% in fall 2015 to 1,537. FTE enrollment was also down 7.7% at 1,503, from 1,628 FTE in fall 2014. Similar to the prior year, Wartburg's fall 2015 enrollment fell short of preliminary budgeted targets. Fitch notes that given the school's modest enrollment, a decline of this magnitude could have a large financial impact on fiscal 2016 operations. Wartburg's budget was adjusted in October to reflect actual headcount. The college historically updates the budget each fall, after actual fall enrollment is certain.

Technical/vendor problems, a new CRM and new counselors/recruiters in admissions with no previous direct experience partly drove the smaller incoming class in fall 2015. Further, Wartburg's principally regional market area has declining numbers of high school graduates. Increased competition for students has been driven by both private and public institutions in Iowa. Though management does not expect significant changes in headcount due to larger incoming classes graduating (from fall 12 and 13) and smaller incoming classes over the last three years; management expects fall 2016 to achieve a larger incoming class over fall 2015 and overall headcount to level out. Retention rates are strong but fluctuate year-to-year. The freshman to sophomore retention rate was up in fall 2015 at about 80% and six-year graduation rates remain solid at 60%.

Fitch views the continuing decline in enrollment as a credit concern, particularly after expectations for incremental growth and stabilized enrollment. Inability to stabilize enrollment drives the rating downgrade at this time.

HEAVILY TUITION RELIANT

Negative-trending enrollment continued for the fourth consecutive year in fall of 2015 and continues to pressure operations. Given its small operating budget, the college's operations are vulnerable to slight variations in enrollment and financial aid without diligent expense management.

Wartburg relies heavily on student revenues, 81.5% in fiscal 2015. Gross tuition and fees in fiscal 2015, were generally flat over prior year despite declining enrollment due to a 5.3% increase in tuition and fees. Net tuition revenue in fiscal 2015 was also flat largely due to a high but generally stable institutional aid requirement. However, the tuition rate increase in fiscal 2016 (fall 2015) was only (2.9%), which could have a negative impact on net tuition revenues if the discounting rate were to increase further, especially given the negative trending in enrollment.

Fitch will continue to monitor the college's ability to grow net tuition revenue, stabilize enrollment and effectively manage the institutional aid expense. The inability to do so could negatively impact the rating further.

DEFICIT OPERATIONS CONTINUING

Wartburg's operating results are historically negative on a full accrual basis, as calculated by Fitch. After showing improvement to positive in fiscal 2013, fiscal 2014 returned to negative; though still negative on a full accrual basis in fiscal 2015, results reflect modest improvement to -2.4%, including its endowment draw, from negative -3.6% in fiscal 2014.

For fiscal 2016, management expects unrestricted results to be worse than fiscal 2015 due to lower than budgeted enrollment, lower tuition rate increase, weaker investment results, one-time retirement incentive plus a severance program which could total about $1 million. Expenses are not immediately down though debt service savings and campaign gifts are expected to partially offset. Beyond fiscal 2016, the college expects improvement.

The college is in the process of identifying both new revenues and expense reductions for fiscal 2016 and beyond of $4 million. Wartburg's ability to achieve operating balance and enrollment stability in the coming fiscal cycle depends on its success in meeting its target. The college's ability to implement a plan that will improve and sustain margins and stabilize headcount will be a key factor in maintaining the stable outlook.

THIN BUT SOUND LIQUIDITY LEVELS

Liquidity levels show continued improvement in fiscal 2015. Cash and investments totaled $85.9 million in fiscal 2015, up from about $75.5 million in the prior year. Consequently, available funds, defined as unrestricted cash and investments, increased slightly to $35.9 million in fiscal 2015 from $33.1 million in fiscal 2014. Wartburg's available funds ratios remain strong for the rating category and indicate some cushion for operations. Available funds are 67% of fiscal 2015 operating expenditures and 42.5% of long-term debt.

Under the bond documents, the college's liquidity covenant requires it to maintain long term debt-to-total cash and investments, including restricted cash, of greater than .50x; based on information provided the fiscal 2015 liquidity ratio calculation improved to 1.15x, exceeding the .50x minimum requirement.

The alternative investment allocation for Wartburg is approximately 23.7%, essentially the same as the previous years. With respect to endowment performance, Wartburg's fiscal 2016 year to date return is down -4.3% and the pooled endowment market value at November 30, 2015 is $63.2 million; however, the endowment has positive returns of 4.7% on an annualized basis since inception. Wartburg continues to draw 4.5% of the endowment based on a rolling 36-month average.

Wartburg's high reliance on student-related revenue necessitates maintenance of a liquidity cushion at or above current levels to manage operating and enrollment fluctuations. Positively, as of December 2015, the college has raised $74 million of gifts and pledges of its $75 million campaign goal a year early after entering a public phase in October 2014. Fitch views Wartburg's established fundraising culture and ability to meet its goals as planned favorably.

HIGH DEBT BURDEN; WEAK BUT ADEQUATE COVERAGE

Post refunding, Wartburg's long-term debt of $85.9 million yields a high MADS burden of 11.8%. Historically, Fitch believes the college has partially offset this debt burden by covering current debt service from operations. However, MADS ($6.2 million) coverage is weak but adequate for the rating category at 1.1x based on fiscal 2015 unrestricted operating revenues, as calculated by Fitch.

The series 2015 debt structure has a slightly ascending structure with MADS occurring in fiscal 2035. The college's debt burden is expected to decline over time due to normal amortization and the lack of any new debt plans. The college continues to be in compliance with its legal rate covenant which requires 1.10x coverage, unless its liquidity ratio exceeds .75x (which it did in fiscal 2015).