Fitch Ratings affirms the 'BB' rating on approximately $48.9 million of outstanding private facility revenue bonds issued by the Iowa Higher Education Loan Authority on behalf of Wartburg College (Wartburg) at 'BB'.
The Rating Outlook is revised to Stable.
Private facility revenue bonds are a general obligation of the college, secured by a lien on revenues and a mortgage on the core campus. The college covenants to generate net income available for debt service equal to 1.1 times (x) or maintain total cash and investments equal to or greater than 75% of total debt.
KEY RATING DRIVERS
STABILIZED CREDIT PROFILE: Wartburg's incrementally improved financial profile is characterized by a positive two year trend for liquidity and enrollment growth.
RATING AFFIRMED: The 'BB' rating continues to reflect a negative operating margin which was previously expected, a weak, though strengthening financial cushion, and a high debt burden.
ENROLLMENT GROWTH: Freshmen matriculates and total headcount reached a four year high in fall 2011 as a result of the college's expanded recruitment efforts and adoption of the common application.
LIMITED FLEXIBILITY: Wartburg remains reliant on student generated revenues and employs heavy annual discounting of tuition, which in tandem marginalize its ability to withstand any decline in enrollment.
WHAT COULD TRIGGER A RATING ACTION
ENROLLMENT DECLINE, RESOURCE DETERIORATION: Wartburg's inability to maintain enrollment levels and sustain recent improvements in financial performance could pressure the rating.
Wartburg's operating margin, calculated by Fitch to exclude any non-operating income except for scheduled annual endowment support, remained negative in fiscal 2011 (-5.5%), though improved from fiscal 2010 (-7.5%). Wartburg expects to end fiscal 2012 with net operating results similar to fiscal 2011. With student generated revenues, which include auxiliary revenues, representing approximately 84% of fiscal 2011 total operating revenues, Wartburg remains extremely dependent upon enrollment. Continued significant discounting of tuition (49% in fiscal 2011) further limits the college's revenue flexibility.
Headcount and matriculated students achieved a four year high in fall of 2011. The college enrolled 563 students, slightly above expectations and total headcount reached 1,805 students, the second highest enrollment level in the past 6 years. Wartburg's success is attributable to expanded student recruitment within its traditional markets and in new markets in the west and southwest. The college also began using the common application in fall 2011 which increased inquiries and application volumes. Fitch expects Wartburg's demand profile to remain unchanged in the near term noting stable student demand is essential to its credit rating.
Balance sheet resources have improved for the college, with favorable investment returns for fiscal 2011 (22.7% in fiscal 2011, up from 13.5% in fiscal 2010) bolstering total cash and investments ($63.3 million). Available funds, defined as unrestricted cash and investments increased to $28.6 million, up from $20 million in fiscal 2010. Available funds represented 56.7% of operating expenses ($50.5 million) and 33.2% of total long term debt ($84.2 million). Given that the college is heavily reliant upon enrollment related revenues, maintenance of the liquidity cushion at or above current levels is needed to manage potential demand volatility.
Wartburg's long-term debt of $84.2 million yields a high maximum annual debt service burden of 13.1%. Offsetting to some degree the magnitude of this burden is the college's ability to cover debt service from operations. Net income available for debt service provided 1.2 times (x) coverage of fiscal 2011 debt service, which when calculated according to bond debt covenants would have exceeded 2x. While there is a need for student housing refurbishment and renovation in the future, the college has no immediate debt plans.
Wartburg, 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.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (July 14, 2011);
--'Revenue-Supported Rating Criteria' (June 20, 2011).
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
Revenue-Supported Rating Criteria
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