Fitch Ratings affirms the 'A-' rating on approximately $99.2 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 Stable from Negative.
The bonds are secured by all legally available and unencumbered funds of
KEY RATING DRIVERS
REVISED OUTLOOK REFLECTS PROGRESS: The revised Outlook reflects Xavier's
modest operating improvement in fiscal 2013 (with expectations that
fiscal 2014 margins will be better) and growing financial resources.
Overall, Xavier is demonstrating progress towards reaching goals set
forth in its strategic financial plan.
STABLE CREDIT CHARACTERISTICS: The 'A-' rating reflects Xavier's stable
enrollment, established market position, healthy annual fundraising,
ability to service outstanding debt from operations and lack of
additional debt plans near-term. Counterbalancing factors include
persistent challenges in graduate enrollment, increasing student aid
needs driven by the competitive operating environment, and significant
exposure to variable rate debt and its related risks.
GROWING FINANCIAL AID NEEDS: Institutional aid has continued to grow to
its highest level in fiscal 2013. Despite these high levels, net tuition
revenue growth was slightly positive, after a dip in the prior year. The
improvement is the result of a tuition rate increase and growth in the
full-time undergraduate cohort in fall 2012, which partly offset
declining graduate enrollment.
PROACTIVE MANAGEMENT TEAM: The impact of Xavier's tuition revenue
shortfall is actively managed, in part, through significant expense
reductions. Management plans to continue to mitigate the financial
impact of decreasing graduate enrollment and higher student aid
requirements with revenue development and continued cost cutting efforts.
MARGIN STABILITY: Fitch expects gradual operating improvement starting
with fiscal 2014, leading to positive operating surplus and growth in
financial resources over the next several years. Failure to restore and
stabilize margins would likely result in a rating change.
ADDITIONAL LEVERAGE: Incurrence of additional debt without a
commensurate increase in available financial resources or sustained
operating improvement could stress the university's financial cushion.
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 $54 million multi-purpose project located adjacent to
campus is under construction. The development is entirely funded and
operated by third parties.
PROGRESS IN ACHIEVING FINANCIAL STABILITY
After projecting a revenue shortfall for fiscal 2013, Xavier ended
fiscal 2013 with a modest operating surplus of $1.4 million (or 0.6%) on
an adjusted basis of $1.4 million, including a modest amount of
endowment spending, compared to $1.23 million (or 0.4%) in fiscal 2012.
Management made the necessary expense adjustments of nearly $3.5 million
to achieve the positive results. Xavier's strategic financial plan for
fiscal 2014 to fiscal 2020 sets forth general planning goals which
demonstrate management's willingness to improve operations.
After projecting a revenue shortfall for fiscal 2013, Xavier ended
fiscal 2013 with a modest operating surplus on an adjusted basis,
including endowment spending, of $1.4 million (or 0.6%), compared to
$1.23 million (or 0.4%) in fiscal 2012. Management made the necessary
expense adjustments of nearly $3.5 million to achieve the positive
results. Xavier's strategic financial plan for fiscal 2014 to fiscal
2020 sets forth general planning goals which demonstrate management's
willingness to improve operations.
For the six-month interim period ending Dec. 31, 2013, operating
revenues exceeded operating expenses by $2.1 million despite a shortfall
in graduate tuition relative to plan. Tuition and fee revenues for the
six-month period were $1.6 million lower than expected due to lower
enrollments in graduate programs, notably the MBA and master in
education. Higher than expected investment returns, auxiliary,
non-tuition revenue sources and expense reduction efforts contributed to
the positive interim results.
Although Xavier's discounting rate for the six-month period was higher
at 38% compared to 36.5% at June 30, 2013, auxiliary revenues were
stable and slightly outperformed budget as a result of undergraduate
enrollment over-achieving pln. In addition, gift revenue slightly
improved for the period, and other revenues, consisting of facility
rentals and certificate-based and executive education programs, also
modestly exceeded expectations for the six months.
Xavier's ongoing expense reduction efforts, which included a significant
reduction in workforce in July 2013, have further contributed to the
positive interim results. Management's recommended fiscal 2015 budget,
which will be considered by the Board of Trustees on Feb. 21, is
balanced and provides $4.5 million in additional funds for strategic
initiatives and new academic programs.
Xavier has made the necessary adjustments in their fiscal 2014
expenditure plan to achieve positive results which support the Outlook
revision. However, Fitch believes that Xavier still faces some
challenges in its effort to achieve financial stability due to its high
tuition discounting rate. Fitch will monitor Xavier's ability to
gradually improve its operating margin and make budgeted transfers to
reserves each year which are needed to add to the financial strength of
the university. The inability to generate surplus operating margins that
could drive growth in balance sheet resources could lead to a ratings
REASONABLE FINANCIAL CUSHION
Xavier's balance sheet is stable and improving. Available funds (defined
by Fitch as cash and investments not permanently restricted) increased
15% in fiscal 2013 to $144.7 million from $125.7 million in fiscal 2012.
As a result, available funds represent a reasonable financial cushion
(87.8% of fiscal 2013 operating expenses and 73.5% of total outstanding
debt) which is adequate for Fitch's 'A-' rating.
Fiscal 2013 unrestricted net assets grew 12.1%, after a 9.1% (or $16.8
million) decline in fiscal 2012 unrestricted net assets which was
associated with investment losses. The statement of position for the six
months ended Dec. 31, 2013 shows improvement in Xavier's balance sheet
with an approximately $18 million increase in overall net assets. This
increase is driven by market gains on investments and improvement in the
interest rate swap valuations.
Fitch will continue to monitor liquidity ratios going forward to ensure
that levels are maintained consistent with the 'A-' rating level. The
drawdown of liquid resources for proposed capital projects and
renovations without future operating surpluses and fundraising success
to offset such drawdown could have negative rating implications.
VULNERABLE TO ENROLLMENT SHIFTS
The university's reliance on student-generated revenues (with tuition,
fees, and auxiliary revenues accounting for 80% of revenues in fiscal
2013) 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. Increasing
undergraduate full-time enrollment and increasing competitive pressures
since fiscal 2010 have increased reliance on institutional aid.
Overall demand is stabilizing. Benefiting from Xavier's strong brand and
diversification of program offerings, Xavier's undergraduate enrollment
grew 3.7% in fall 2013, after a 1.2% dip in fall 2012, making it
Xavier's largest undergraduate class in history. Favorably, growth in
undergraduate enrollment aided in offsetting declining graduate
enrollment. As seen nationally by Fitch, Xavier's declining graduate
enrollment is mostly attributable to lower demand for the MBA and
graduate education programs. Following a 4.2% drop in total headcount
enrollment in fall 2012, total enrollment increased a modest 0.3%.
While Xavier overachieved in meeting its undergraduate enrollment budget
in fall 2013 by 65 students (1.6% over fiscal 2014 budget), it
underachieved in meeting its budget for graduate enrollment, which is
based on credit hours. While this is a concern, Xavier was able to
accommodate the variation in actual enrollment to budget, due to the
availability of flexible resources (faculty teach both undergraduate and
graduate classes). Management indicated that the fiscal 2014 spring and
summer graduate credit hours are expected to modestly increase over
amounts presented to Fitch, which should decrease the shortfall, but
they are projecting downward to be conservative.
Xavier continues to be challenged by its competitive operating
environment and the state's changing demographics, with the number of
high school graduates declining, and is managing appropriately by adding
regional recruiters. For fall 2014 (fiscal 2015), management indicates
that year-to-date deposits are up 5% for full time undergraduates.
Xavier is being reasonably conservative by budgeting for fewer freshmen
in fall 2014 than it attained in fall 2013 (1,228 versus 1,282,
respectively). Favorably, Xavier is demonstrating the ability to attract
new students, without compromising quality. The ability to attract and
retain students has positive operating implications for the university.
HIGH BUT MANAGEABLE DEBT BURDEN; REDUCED EXPOSURE TO VRDB
Stable operations in fiscal 2013 provide for adequate 1.8x coverage of
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 43% of Xavier's
outstanding bonds (down from 49%), with the majority hedged through an
interest-rate swap. In January 2014, Xavier completed a private
placement with a bank to refund its un-hedged variable rate debt in the
amount of approximately $20 million. The bank deal matches the original
remaining life of the series 2000B bonds and matches the principal
amount outstanding. Xavier did not increase its debt but reduced some of
the risk of its capital structure. Further, the amortization schedule
and covenants remain the same.
Fitch believes the university's debt profile continues to present credit
risk. Swap collateral counterparties are monitored closely, and Xavier
has not had to post any collateral to date. Fixing a portion of its
variable rate debt eliminates not only interest rate risk, but put risk
on the debt, as well as renewal and pricing risk on the accompanying
letter of credit (LOC), which Fitch views favorably, as LOC fees,
remarketing fees and trustee fees are eliminated. At the same time, the
university successfully negotiated a reduction in LOC rates and a
five-year extension on LOCs supporting its remaining variable rate debt,
which Fitch views positively and is a testament to the experienced
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 10, 2013);
--'Fitch Affirms Xavier University. OH Revs at 'A-'; Outlook Revised to
Negative (February 15, 2013).
U.S. College and University Rating Criteria
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