OREANDA-NEWS. Fitch Ratings has downgraded the rating on $224.5 million Illinois Finance Authority revenue bonds, series 2007 and 2009, issued on behalf of Roosevelt University (Roosevelt), to 'BB+' from 'BBB-'.

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of the university. Additional security provisions include a cash-funded debt service reserve, funded at maximum annual debt service (MADS), and a first lien mortgage on the financed facilities.

KEY RATING DRIVERS

DEFICITS DRIVE DOWNGRADE: The downgrade to 'BB+' reflects the university's fifth consecutive year of negative operating margins, and another deficit projected for fiscal 2016.

HIGH STUDENT-REVENUE DEPENDENCY: Roosevelt's reliance on student-generated revenues makes it highly dependent on enrollment, which has been uneven, contributing to flat net tuition over the past three fiscal years. An enrollment decline in fall 2015 is expected to contribute to another operating deficit.

HIGH DEBT LEVERAGE: The university has a limited balance sheet combined with high debt leverage. MADS burden was a very high 15.7% of fiscal 2015 operating revenues.

WEAK MADS COVERAGE: Roosevelt generated thin 1.1x MADS coverage in fiscal 2015 (current debt service coverage was 1.2x). However, an escalating debt structure adds risk, as MADS will increase to $19 million in fiscal 2021, up from the current $16 million. Fitch views the university as having no new debt capacity.

LEADERSHIP CHANGES: Roosevelt has a new president with a track-record of fundraising, who has initiated marketing, budget and admissions reforms. The university is in the process of filling several key leadership positions, including enrollment management and development.

RATING SENSITIVITIES

STRESSED ENROLLMENT: Failure to increase enrollment, grow net tuition revenue and improve operating performance will likely result in rating pressure for Roosevelt University.

OPERATING DEFICITS: Inability to steadily improve GAAP operating results in fiscal 2017 will further pressure Roosevelt's rating.

DEBT SERVICE COVERAGE: Failure to meet current debt service coverage (DSC), as calculated by Fitch, in fiscal 2016 could add increased rating risk for Roosevelt University. Bond documents for the university, however, do not have coverage or liquidity covenants.

CREDIT PROFILE

Founded in 1945, Roosevelt's main campus is located in the historic auditorium building in downtown Chicago, IL. The recently opened Wabash building serves as a 'vertical campus' and academic center and provides additional student housing. The university also owns and operates a 30-acre suburban campus in Schaumburg, IL, a northwest suburb of Chicago.

In fall 2015, Roosevelt enrolled 4,285 full-time equivalent (FTE) students, an 11% decrease from fall 2014. Management attributes this not to lack of demand, but to admissions systems failures. Management assures Fitch that admissions issues have been corrected.

Following a national search, Roosevelt's board selected Dr. Ali Malekzedah as the university's sixth president as of July 1, 2015. Dr. Malekzedah has extensive fundraising experience, and served as business dean at various private and public universities over the past two decades. Other significant senior leadership positions are in the process of being filled, including senior positions in enrollment management and advancement.

CONTINUING OPERATING DEFICITS

Roosevelt has generated negative GAAP operating margins since at least fiscal 2011, including fiscal 2015. Another GAAP deficit is expected in fiscal 2016. The margin in fiscal 2015 was negative 3.8% (a $4.7 million deficit), which compares to negative 2.8% in fiscal 2014, and negative 3.1% in fiscal 2013.

Management projects negative fiscal 2016 results due to enrollment declines in fall 2015, attributed to admissions process issues, which have been fixed.

The university's operations rely heavily on student generated revenues, about 88% in fiscal 2015. Fitch is uncertain of management's ability to curb expenses significantly, as the university has been actively controlling expenses for several years. Roosevelt's new leadership is focused on increasing both enrollment and net student revenues; Fitch views success with these efforts as necessary to maintain the current rating.

Undergraduate tuition increased a modest 1.5% in both fall 2015 and fall 2014, and net tuition revenue has remained stable between fiscal years 2013 and 2015. Tuition will increase an average 3.6% in fall 2016.

STRESSED ENROLLMENT

Fall 2015 enrollment was down 12.4% to 5,352; FTE enrollment was down by 529 (11%) to 4,285. Management expects improvement for fall 2016 and reports that first-time freshman applications are up, as are admissions. Roosevelt students are primarily from the Chicago metro area. A new marketing campaign focusing on the quality of Roosevelt's academic programs is about to begin.

Management reports the enrollment decline in fall 2015 was primarily due to admissions process failures, and not weak demand. The university reports that process changes have been fixed. Fitch expects that Roosevelt's fall 2016 enrollment will improve.

Enrollment has declined at Roosevelt's Schaumburg campus over time. The president is studying new programs to reverse the decline. Roosevelt's pharmacy program is based in Schaumburg.

HIGH DEBT LEVERAGE

Available funds, defined by Fitch as cash and investments not permanently restricted, totaled $90.9 million at Aug. 31, 2015. This represented 72.2% of fiscal 2015 operating expenses and a narrower 37.9% of outstanding debt (about $240 million). Outstanding debt is slightly overstated, as it includes loans payable and not related receivables. Both liquidity metrics weakened from fiscal 2014 levels. Fitch views Roosevelt's limited financial cushion, in combination with high debt leverage, as a concern.

Annual debt service will increase significantly in 2021 from $15 million to about $19 million, which is very close to MADS in 2036. The university's MADS burden in fiscal 2015 is very high at 15.7%. Positively, Roosevelt achieved 1.1x MADS coverage in fiscal 2015 (1.2x current coverage), and management expects to meet MADS coverage in fiscal 2016. The university has no new debt plans at this time.