Fitch Ratings has assigned a 'BB' rating on approximately $83.4 million
private college revenue refunding bonds, series 2014 issued by the Iowa
Higher Education Loan Authority on behalf of Wartburg College (Wartburg
or the college).
The fixed rate series 2014 bonds (the bonds) are expected to sell via
negotiation the week of July 28, 2014. Proceeds of the bonds will be
used to current refund all of the outstanding series 2005A and series
2005B bonds, and to pay costs of issuance.
At the same time, Fitch affirms the rating on the outstanding series
The Rating Outlook is Stable.
The series 2014 private college facility revenue bonds are a general
obligation of the college, secured by a lien on revenues of the college
and a mortgage on the core campus, including the wellness center which
was the prime security for the series 2005B bonds. Additionally, the
bonds are supported by a debt service reserve fund equal to maximum
annual debt service (MADS).
KEY RATING DRIVERS
FINANCIAL PROFILE IMPROVING: Wartburg's 'BB' rating reflects continuous
operating margin improvement, although margins remain negative as
calculated by Fitch; relative stability in the unrestricted liquidity
cushion; and no new debt plans alleviate some concern over the college's
high debt burden.
DECLINING ENROLLMENT TREND: Wartburg has experienced two consecutive
years of a reduction in full-time equivalent (FTE) counts. Management
has ramped up recruitment efforts which reflect an increase in
year-over-year applications, admits and deposits for fall 2014 to date
(at July 1, 2014).
FINANCIAL FLEXIBILITY LIMITED: Wartburg is dependent on a high level of
student fees to support operations. This critical reliance on student
related revenue is exacerbated by a nearly 50% discount rate.
OPERATING PERFORMANCE, RESOURCE DETERIORATION: The rating is sensitive
to shifts in enrollment and resultant impacts to operating performance.
Wartburg's inability to sustain and build on vastly improved margins
over the past four years and stabilize headcount could negatively
pressure the rating. Conversely, enrollment growth and continued
improvement in operating margins driving resource growth may yield
positive rating momentum.
Wartburg College, established in 1852 as a liberal arts college of the
Evangelical Lutheran church, is located in Waverly, IA and serves
predominantly in-state undergraduate students.
OPERATING MARGINS CONTINUE TO IMPROVE
Wartburg's operating margin, calculated by Fitch to exclude any
non-operating income except for scheduled annual endowment support,
improved in fiscal 2013 but still remained negative (1.8%). Fiscal 2014
is expected to be supported by growth in gifts and contributions, which
increased by about $1 million for fiscals 2012 and 2013. Although
enrollment declined for the school year 2012-2013, Wartburg's focus on
maximizing net yield per student and curbing expense growth assisted in
producing margin improvement.
The audited financial statements for the fiscal year ending May 31, 2014
are not yet completed. Previously Fitch noted an expectation of Wartburg
generating a break-even operating margin by fiscal 2014 on a full
accrual basis, as calculated by Fitch to include the endowment draw and
depreciation expense, but exclude realized and unrealized gains.
According to management, operating results are expected to remain
positive on a cash-flow basis; however, break-even results are not
expected for fiscal 2014 on a full accrual basis. Although management
expects to achieve their targets for the year, Fitch is unable to assess
the progress as Wartburg does not typically produce interim statements.
Operational budget information provided to Fitch at fiscal year-end 2014
is balanced on a budgetary basis.
The college's admissions profile is also ahead of last year. At this
point in time last year, the college received 2,373 applications,
admitted 1,794 students, and received 475 net deposits versus this year.
The college has received 2,413 applications, admitted 1,862 students and
received 494 net deposits to date. Wartburg is also running .3% lower in
summer melt this year than last.
Negative enrollment growth in fall of 2014 would most likely pressure
the rating, however, Wartburg's ability to consistently improve margins
despite enrollment loss is viewed favorably. Positively, the college
typically updates the operating budget in the fall, after actual fall
enrollment is certain. Management believes they have built in enough
flexibility in the budget process to handle any slight variations in
enrollment and financial aid.
LIMITED REVENUE FLEXIBILITY AND HIGH TUITION DISCOUNTING
Wartburg's revenues are predominantly sourced from student related
tuition, fees and auxiliary services. These funds comprise a high
portion of fiscal 2013 operating revenues. Wartburg remains dependent
upon enrollment growth, and the college's practice of regularly
implementing increases in tuition and fees is tempered by a high tuition
discounting rate of 49.8% for fiscal 2013, compared to other 'BB'
category credits rated by Fitch.
According to management, student financial aid awards are expected to be
similar to what was budgeted in fall 2014; however, a flat to slightly
higher discounting rate than the prior year is expected. Favorably, the
college focuses on growth in the average net tuition per student which
is expected to grow in fiscal 2015, along with overall net tuition.
Fitch notes that the confluence of high revenue concentration within
student fees and charges along with high discounting has not detracted
from Wartburg's year-over-year margin improvement. The college is
expected to continue to have a relatively high discount rate compared to
other private colleges and universities similarly rated by Fitch.
FISCAL 2013 LIQUIDITY IMPROVED
Balance sheet resources increased in FY13 as a result of investment
returns and gifts and contributions. Cash and investments totaled $71.6
million in fiscal 2013, up from about $61 million in the prior year.
Consequently, available funds, defined as unrestricted cash and
investments increased to $31.8 million in fiscal 2013 from $24 million
in fiscal 2012.
Wartburg's available funds offer improvement in cushion and benefitted
from a stronger return in FY13. These funds covered 61.8% of operating
expenditures and 38.5% of long-term debt.
The alternative investment allocation for Wartburg is approximately 23%,
essentially the same as the previous year. Management reported that the
endowment returned 11% fiscal year-to-date, increasing the pooled
endowment market value as of May 31, 2014 to $56.6 million (unaudited),
compared to $52.4 million over the prior year.
Wartburg's reliance upon enrollment-related revenues necessitates
maintenance of the liquidity cushion at or above current levels to
manage potential demand volatility. As of May 2014, the College has
raised $44 mm, or 60% of its $75 million goal under its comprehensive
capital campaign, and intends to enter the public phase of the campaign
in Fall of 2014. Fitch will continue to monitor the college's progress
towards this goal.
After the refunding, Wartburg's long-term debt of $83.6 million yields a
high pro-forma MADS burden of 12.4%. Offsetting the debt burden
magnitude to some degree is the college's ability to adequately cover
debt service from operations. Coverage of pro forma MADS is 1.19x based
on fiscal 2013 unrestricted operating revenues, as calculated by Fitch.
The series 2014 debt is structured with ascending pro-forma MADS
occurring in fiscal 2037. Pro-forma average annual debt service (AADS)
coverage based on fiscal 2013 operations is stronger at 1.32x. The
college's debt burden is expected to decline over time due to normal
amortization and the lack of any new debt plans.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 12, 2014);
--'Fitch Affirms Wartburg College, IA's Revs at 'BB'; Outlook Stable'
(March 19, 2014).
U.S. College and University Rating Criteria
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