NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has assigned an 'A-' rating to the series 2014 revenue bonds to be issued in the amount of approximately $19 million by the Pennsylvania Higher Educational Facilities Authority on behalf of Widener University (Widener).
The bonds will sell via negotiation on or about the week of Aug. 4. The proceeds will be used to advance refund the university's outstanding series 2005 revenue bonds and to pay costs of issuance.
At the same time, Fitch affirms the 'A-' rating on approximately $85.5 million of outstanding revenue bonds.
The Rating Outlook is Stable.
SECURITY:
The bonds are a general obligation of the university.
KEY RATING DRIVERS
IMPROVING ENROLLMENT: Widener's headcount enrollment grew slightly in fall 2013 driven by growth in undergraduate and some graduate programs, offset by continued but slowing declines in law school enrollment. Widener's financial performance is highly dependent on enrollment, as net student fees account for 91.6% of fiscal 2013 unrestricted operating revenues.
CONSISTENTLY POSITIVE OPERATING MARGINS: Widener's operating margin narrowed but remained positive in fiscal 2013. Management has responded effectively to pressured revenues by containing costs and planning conservatively. Unaudited fiscal 2014 results indicate margin improvement due to structural expense reductions and stable operating revenues.
STUDENT AID PRESSURES MARGIN: Institutional student aid continues to grow as Widener expands its undergraduate segment and recruits academically stronger students. Tuition discounting reached its highest level over the past five years and, along with lower law school enrollment, contributed to declines in total net tuition revenue for fiscal 2013 and (unaudited) 2014.
ADEQUATE FINANCIAL CUSHION: Widener's balance sheet resources relative to operating expenses are adequate but weaker than similarly rated peers. Fitch views the university's financial cushion relative to long-term debt as somewhat stronger, providing a solid level of financial flexibility that is consistent with the 'A' rating category.
MANAGEABLE DEBT BURDEN: Pro forma maximum annual debt service (MADS) represented a moderate 4.2% of fiscal 2013 unrestricted operating revenues. Fiscal 2013 net income available for debt service covered MADS by a healthy 2.5x. The university has no additional debt plans.
RATING SENSITIVITIES:
ENROLLMENT STABILITY: Fitch expects Widener to maintain stable to positive overall enrollment trends while leveling off the growth in institutional student aid over the next two fiscal years as planned. Failure to achieve these goals could pressure the rating due to Widener's high dependence on net student tuition and fees.
CREDIT PROFILE:
Originally founded in Wilmington, DE, in 1821, Widener offers liberal arts and science degrees for undergraduate, graduate, and professional students at its main campus in Chester, PA, as well as its auxiliary campuses in Wilmington, DE and Harrisburg and Exton, PA. Widener also operates Delaware's only law school. Total fall 2013 headcount enrollment was 6,311. Widener is accredited by the Middle States Commission on Higher Education, which last renewed its accreditation in 2012 for a period of 10 years. Widener's graduate and professional programs all maintain the necessary and proper accreditations.
HIGH TUITION DEPENDENCE; ENROLLMENT IMPROVING
Widener is very dependent on student-generated tuition and fees, which accounted for 91.6% of unrestricted operating revenues in fiscal 2013. This is not uncommon among private higher education institutions, but the university's budget is nonetheless very sensitive to changes in enrollment. The very competitive environment for schools in the mid-Atlantic region further necessitates sustaining demand and carefully managing enrollment levels.
Total headcount enrollment increased slightly in fall 2013 as growth in undergraduate enrollment offset continued law school declines. Undergraduate headcount increased 4.3% to 3,052 as application growth yielded the university's largest-ever freshman class. The university expects continued enrollment growth outside the law school through investment in high growth programs and initiatives to improve retention, which are starting to show positive results. The university aims to admit a fall 2014 freshman class that is smaller than its fall 2013 class but larger than in prior years.
Law school headcount enrollment has declined sharply since fall 2011, consistent with national trends, and continues to challenge overall enrollment. Widener is actively managing the decline, however, which should moderate as the size of incoming classes stabilizes. Further, Widener will likely pursue separate American Bar Association accreditation of its two law school campuses in Wilmington, DE and Harrisburg, PA. The two campuses are currently accredited on a combined basis. Management believes that separating the two campuses would allow each to focus on its strengths and to market itself more effectively.
PRUDENT MANAGEMENT MAINTAINS POSITIVE OPERATIONS
Widener's GAAP-based operating margin narrowed as anticipated to 1% in fiscal 2013 (including endowment payout), compared to 1.7% in fiscal 2012, and following a strong history of solidly positive margins averaging 3.9% (fiscal years 2008-2012). Weaker margins are largely due to declining enrollment associated with its law school and increased tuition discounting, both of which contributed to lower net tuition revenue. Fitch notes that a failure to moderate undergraduate discounting and grow net tuition revenue over the next two years would indicate weakness in demand and could negatively pressure the rating.
Unaudited fiscal 2014 operating results appear in line with the stronger historical levels. Revenues remained challenged, but the university managed its budget closely and continued to benefit from structural expense cuts. The fiscal 2015 preliminary budget, which will be finalized in the fall, conservatively projects a slight deficit due to law school expenses, including the upfront costs of obtaining separate accreditations for the law school campuses. Fitch believes it is too early to estimate actual results but notes Widener's track record of meeting or exceeding budgeted operating results.
ADEQUATE LIQUIDITY
Available funds (defined by Fitch as cash and investments not permanently restricted) improved modestly to $78.1 million as of June 30, 2013. Coverage of fiscal 2013 operating expenses from available funds (50.7%) is satisfactory but at the lower end for the 'A' category. Available funds are adequate compared to total pro forma debt (89.4%) and are roughly in line with peers, reflecting Widener's moderate leverage position. Unaudited fiscal 2014 results show further improvement in available funds based on solid investment returns and an operating surplus.
Fitch is comfortable with moderate volatility in the university's available funds, as accumulated surpluses from operations remain its primary vehicle for funding capital projects. Nonetheless, a significant drawn down in available funds, or additional debt issuance that pressured liquidity levels, would pressure the rating if not accompanied by a commensurate increase in revenues.
MANAGEABLE DEBT BURDEN
Widener's positive operations, inclusive of endowment spending, have historically provided strong coverage exceeding that of similarly rated peers. Fitch views favorably that pro forma MADS coverage from operating cash flow remained strong at 2.5x even with the reduced fiscal 2013 operating margin. The university's debt burden remains manageable with total MADS of $6.5 million consuming a moderate 4.2% of fiscal 2013 unrestricted operating revenues. Widener's moderate debt burden despite significant capital investment over the past decade reflects its practice of funding capital projects mainly through operating surpluses.
Widener's debt structure is conservative, with all fixed rate debt and generally level debt service. A new dormitory project funded with the series 2013 proceeds is expected to be completed for fall 2015. Costs for any near-term capital improvements will be offset by internal resources and cash received from the university's fundraising efforts. The university has no additional debt or major capital plans at this time.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's U.S. College and University Rating Criteria, this action was informed by information from Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria', dated May 12, 2014;
--'Fitch Rates Widener University (PA) Revs at 'A-'; Outlook Stable', dated Aug. 2, 2013.
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=842867
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