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.
The bonds are secured by all legally available and unencumbered funds of the
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
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
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
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
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.