Fitch Ratings affirms the 'BBB+' rating on approximately $137.2 million
of fixed-rate revenue bonds issued by the Pennsylvania Higher
Educational Facilities Authority on behalf of La Salle University (La
Salle, or the university).
The Rating Outlook is revised to Negative from Stable.
Revenue bonds are an unsecured, general obligation of the university.
KEY RATING DRIVERS
WEAKENED OPERATING PERFORMANCE: The Outlook revision primarily reflects
La Salle's recent enrollment declines that contributed to weakened
GAAP-based operating performance and debt service coverage. The 'BBB+'
rating continues to reflect La Salle's track record of still
breakeven-to-positive operations, adequate balance sheet cushion, and
sufficient debt service coverage, offset by a high reliance on
student-generated revenue and a competitive operating environment.
ENROLLMENT PRESSURES PERSIST: Enrollment fell slightly for a second
consecutive year in fall 2013 at the part-time undergraduate and
graduate level, while La Salle's tuition discount rate continued to
climb, partly reflecting the region's competitive higher education
market. Demand appears to be stabilizing, with preliminary fall 2014
enrollment figures in line with the prior year's level.
ADEQUATE BALANCE SHEET CUSHION: La Salle's financial cushion remains
modest for the rating level, but balance sheet resources continued to
grow in fiscal years 2013 and 2014, and provide the university an
adequate cushion relative to operating expenses and outstanding debt.
MANAGEABLE DEBT BURDEN: La Salle's moderately high pro forma debt burden
is partially offset by its consistent generation of sound debt service
coverage from net operating income, although coverage levels have
tightened in line with the compression in the university's operating
CONSERVATIVE CAPITAL STRUCTURE: La Salle's debt burden is additionally
mitigated by its entirely fixed-rate debt structure and current lack of
major capital or additional borrowing needs.
ENROLLMENT STABILITY DRIVES MARGIN: Due to its significant reliance on
student-generated revenue as a driver of operating performance, the
rating is sensitive to La Salle's ability to stabilize enrollment and
prudently manage a growing discount rate, while at the same time
maintaining student and programmatic quality.
ADDED LEVERAGE: While not presently anticipated, the incurrence of
additional debt without a commensurate increase in available financial
resources could adversely pressure the rating.
La Salle University, founded in 1863 by the Christian Brothers, is
located on a 133-acre campus 10 miles north of Center City Philadelphia.
In addition to its main campus, the university also has a campus in
Newtown, PA (Bucks County), which opened in 1997, and a campus in
Plymouth Meeting, PA (Montgomery County), which opened in 2008. La Salle
is made up of three schools - Arts and Sciences, Business, and Nursing
and Health Sciences, in addition to the College of Professional and
OPERATING PERFORMANCE WEAKENING
Similar to many private colleges and universities, La Salle's revenue
base is highly concentrated in student-generated tuition, fees and
auxiliary receipts, underscoring its need to successfully meet
enrollment goals to balance operations. These revenues typically
comprise over 83% of La Salle's total unrestricted operating revenue;
86.5% in fiscal 2013. Headcount (6,448) and full-time equivalent
enrollment (5,231) declined 2% and 1%, respectively, in fall 2013. This
follows a 1.6% and 1.5% decline in fall 2012, although this was partly
the result of a planned reduction in freshmen students to improve
student quality. Importantly, fall 013 full-time undergraduate
enrollment was flat with the prior year, although tuition discounting
continued to increase (41.5% for fall 2013). Most of the decline has
been in part-time undergraduate, non-degree and graduate programs, a
trend Fitch has observed nationwide.
La Salle's operating margin, on a full accrual basis, has been positive
for each of the past five fiscal years (2009-2013), averaging a sound
2.3% over this time period (including endowment distributions). However,
the operating margin softened over the past two fiscal years, falling to
0.3%, or effectively breakeven, from 1.9% in fiscal 2012. The fiscal
2012 margin declined from 4.4% in fiscal 2011, although fiscal 2011
benefited from a one-time non-recurring insurance settlement payment.
Fitch notes that La Salle's endowment distribution has been
conservatively at the lower end of its policy, which is viewed
positively and has enabled the university to preserve and build balance
Per unaudited interim data, fiscal 2014 is estimated to have ended just
slightly better than fiscal 2013 (on a cash basis), with an operating
surplus of about $386,000 compared to a budget of $242,000 in fiscal
2013. Management continues to focus on cost containment and improving
net operating income. However, because of La Salle's limited balance
sheet liquidity and moderately high debt burden, any further margin
deterioration, which may also impact debt service coverage levels, may
result in downward rating pressure.
ADEQUATE BALANCE SHEET CUSHION
La Salle's financial cushion remains modest for the rating level, but
balance sheet resources continue to grow. Available funds, or cash and
investments not permanently restricted, totaled $77.4 million as of June
30, 2013, up from $64.3 million as of June 30, 2012 and up a significant
81% since fiscal-year-end 2009. Available funds covered fiscal 2013
operating expenses ($125.8 million) and outstanding debt ($138.3
million) by 61.5% and 55.9%, respectively. Exposure to alternative,
illiquid asset classes remains moderate at approximately 18.7% as of
June 30, 2013.
La Salle's ability to grow financial resources while operating
performance has weakened is viewed favorably. However, based on its only
modest financial cushion, any deterioration to the university's resource
base could lead to downward rating pressure Historically, La Salle's
stronger operating performance had offset its lighter liquidity levels.
Fitch notes that a sustained track record of just breakeven performance
coupled with La Salle's existing balance sheet cushion will be more
reflective of a 'BBB' rather than a 'BBB+' rating. Conversely, the
university's ability to manage its operating margin through stabilizing
enrollment and continued expense management, as noted above, while
growing balance sheet resources, could lead to stabilization of the
Outlook at the current rating level.
HIGH BUT MANAGEABLE DEBT BURDEN
La Salle's debt burden remains moderately high but manageable. Pro forma
maximum annual debt service (MADS) occurs in fiscal 2041 at
approximately $9.2 million. Average annual debt service (AADS) equates
to a slightly lower $8.9 million, indicating the university's mostly
level debt service schedule. MADS consumed a moderately high 7.3% of
fiscal 2013 unrestricted operating revenues, with AADS consuming a
Partially offsetting the high debt burden is La Salle's consistent
ability to generate sound debt service coverage from net operating
income. Over the past five fiscal years, current-year debt service
coverage ranged between 1.6x (fiscal 2013) and 2.4x (fiscal 2011).
However, MADS coverage fell slightly to 1.3x in fiscal 2013 from 1.5x
and 1.9x in fiscal years 2012 and 2011, respectively, as La Salle's
operating margin tightened. AADS coverage was also 1.3x.
Following refinancing of its variable-rate demand debt in fiscal 2012,
La Salle has no variable-rate exposure remaining with all outstanding
debt fixed-rate, which Fitch views positively, providing an additional
offset to the university's moderately high debt burden. Moreover, no
additional debt is planned at this time and new projects including
renovation, new construction and expansions are expected to be funded by
fundraising and current resources. However, any additional debt
incurrence without a commensurate increase in available financial
resources or revenues could pressure the rating.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'College and University Rating Criteria' (May 2014);
--'Fitch Affirms La Salle University's (PA) Rev Bonds at 'BBB+'; Outlook
Stable' (July 2013).
U.S. College and University Rating Criteria
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