TEXT - Fitch revises Ohio's Xavier University rating outlook

Fri Feb 15, 2013 10:18am EST

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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.
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