TEXT - Fitch revises Ohio's Xavier University rating outlook
Feb 15 - Fitch Ratings affirms the 'A-' rating on approximately $100.7 million of outstanding Ohio Higher Educational Facility Commission (OHEFC) revenue bonds series 2008C and series 2010 issued on behalf of Xavier University (Xavier, or the university). The Rating Outlook is revised to Negative. SECURITY The bonds are secured by all legally available and unencumbered funds of the university. KEY RATING DRIVERS OUTLOOK REFLECTS OPERATING CHALLENGES: Lower than projected enrollment trends and higher discounting rate drive weakening operating performance. This concern in addition to significant exposure to variable rate debt and its related risks are counterbalanced by Xavier's established market position, healthy annual fundraising, ability to service outstanding debt and lack of additional debt plans near-term. GROWING FINANCIAL AID NEEDS: Institutional aid has continued to grow to its highest level in fiscal 2012, driving the decline in net tuition revenues, due to lower than projected enrollments. PRO-ACTIVE MANAGEMENT TEAM: Management plans to mitigate the financial impact of decreasing enrollment and higher student aid requirements with continued cost cutting and revenue development efforts, and has implemented an expense reduction plan in the current fiscal year to offset anticipated revenue shortfalls. RATING SENSITIVITY DETERIORATING OPERATING MARGIN: Failure to show progress towards achieving balanced operations over the next few years, leading to positive operating surplus and growth in financial resources, will likely result in a rating change. CREDIT PROFILE Xavier's operating performance in fiscal 2011 trended downward as reflected in the 1.4% operating margin (1.9%, inclusive of the endowment payout). This is based on a 12 month fiscal period ending May 31. In fiscal 2011, accounting changes designating June 30 as the fiscal year end, resulted in below breakeven results reflecting additional expenses reported in the 13-month period. A revenue shortfall in student-generated revenue for fiscal 2012 caused management to make budget reductions campus-wide during the year, which resulted in a break-even operating margin of 0.4% (0.7%, inclusive of the endowment payout). Projecting another revenue shortfall in fiscal 2013, management has made further expense budget adjustments of nearly $3.5 million but expects an operating loss for fiscal 2013 which will be funded with reserves. Despite some improvements, Fitch believes Xavier still faces some challenges in its effort to achieve financial stability. Fitch will monitor management's progress in stabilizing GAAP operating performance in conjunction with increases in institutional financial aid given that historically large operating surpluses have driven growth in balance sheet resources. The inability of Xavier to maintain positive operations in future years that will allow it to preserve and grow its balance sheet may yield negative rating pressure. Available funds (defined by Fitch as cash and investments not permanently restricted), which increased 11% to $134.5 million in fiscal 2011, dropped 6.5% to $125.7 million in fiscal 2012. Balance sheet resources, representing 75.9% of operating expenses and 62.5% of total long-term debt in fiscal 2012, are lower than Fitch's 'A' rating category median. The university's reliance on student generated revenues (with tuition, fees, and auxiliary revenues accounting for 79% of revenues in fiscal 2012) is not unusual for private colleges, but makes the university susceptible to changes in enrollment from year to year, necessitating close monitoring of demand statistics and enrollment trends. Due to lower than anticipated gross tuition revenues and growth in institutional aid Xavier's net tuition revenues declined by 3.7% in fiscal 2012. According to management, increasing undergraduate full-time enrollment and increasing competitive pressures since fiscal 2010 has increased reliance on institutional aid as reflected in the increasing discount rate to 34.6% in fiscal 2012. Management is aware of the potential impact of increased institutional aid on operations in future years and is taking required action. Plans are in place to increase tuition revenues by diversifying its program offerings and increasing regional recruiting. The Board of Trustees has approved nine new programs mid-fiscal year 2013. These programs and other enrollment initiatives are expected to generate $20 million in incremental revenues over the next five years. Xavier is in the process of finalizing its integrated academic and financial plan. The plan incorporates the cost review process and recommendations relating to the increasing levels of student aid, which will be presented to the Board of Trustees in the next month. Fitch is concerned with the required expenses associated with the approved programs but views Xavier's pro-active management favorably. Fitch will monitor management's success in aligning revenues and expenditures in the next two fiscal years as it implements the plan, which will be key to preserving valuable liquid resources. Stable operations in fiscal 2012 provide for adequate 1.8x coverage of the pro-forma maximum annual debt service (MADS). Pro-forma MADS burden is high at 8.1% but manageable given Xavier's lack of additional debt financing plans. Variable-rate debt accounts for approximately half of Xavier's outstanding bonds, with the majority hedged through an interest-rate swap. Fitch believes the university's aggressive debt profile continues to present credit risk. Swap collateral counterparties are monitored closely, and Xavier has not had to post any collateral to date. In fiscal 2012, the university diversified the banks providing the letters of credit supporting its variable-rate bonds and reduced exposure to alternative investments which Fitch views positively. Xavier, founded in 1831, is a private, co-educational Jesuit institution located in Cincinnati, Ohio. The university successfully opened its Hoff Academic Quad in fall 2010, which includes two major academic buildings. A new student housing and dining complex opened on schedule in fall 2011, completing a significant makeover of the university's physical plant. A new $60 million multi?purpose project is anticipated and is in the early stages of development which will be entirely funded by third-party developer.