Aug 21 - Fitch Ratings has assigned an 'A-' rating to $31 million
Pennsylvania Higher Educational Facilities Authority (PHEFA) revenue bonds
issued on behalf of University of the Sciences in Philadelphia (USciences,
or the university).
The series 2012 bonds (the bonds) are expected to be sold via negotiation on or
about the week of Aug. 28, 2012. The proceeds of the bonds will be used to fund
the construction and equipping of an addition to USciences' science and
technology center, various infrastructure improvements, certain deferred
maintenance needs, capitalized interest, and other costs related to the issuance
of the bonds.
The Rating Outlook is Stable.
Repayment of the bonds is a general obligation of the university, which will be
issued on parity with the university's outstanding PHEFA series 2005 A and 2008
bonds (the existing bonds).
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: The 'A-' rating reflects a sufficient amount of
financial flexibility demonstrated through historically positive operating
results and an adequate level of balance sheet resources to compensate for the
very high pro-forma debt burden and softening enrollment profile.
CONSIDERABLE DEBT BURDEN: Following the issuance of the series 2012 bonds, the
university's pro-forma debt burden will reach a high 9.6% of fiscal 2011
operating revenues. The level of coverage provided (1.5x in fiscal 2011) does
not materially offset the substantial risk posed by the high debt burden.
LIMITED FUTURE CAPITAL NEEDS: USciences' limited additional capital needs
provides some level of comfort regarding the debt burden, as it is not expected
to grow beyond the current level in the near term.
CONSERVATIVE BUDGETING MITIGATES ENROLLMENT DECLINES: USciences' careful and
conservative budget process has allowed management to successfully maintain
positive operations despite recent fluctuations in net tuition revenues.
WHAT COULD TRIGGER A RATING ACTION
ADDITIONAL DEBT ISSUANCE: While not expected over the near term, issuance of
additional revenue bonds without a commensurate increase in financial resources
available to support repayment, would trigger a negative rating action.
UNREALIZED ENROLLMENT TURNAROUND: Failure to stabilize and begin to grow
enrollment largely based on the strong demand for the new program offerings
could create negative ratings pressure.
The 'A-' rating is primarily driven by USciences' healthy financial profile.
Over the past five fiscal years (2007 - 2011), the university's operating margin
(including formula-driven endowment distributions) has averaged 4.8%, and has
not dropped below the break-even level despite the turbulent economic
environment. Based on unaudited results, the 2.5% margin generated in fiscal
2011 is expected to be improved upon in fiscal 2012, which concluded on June 30.
The university's enrollment underpins the stability of student-generated
revenues, which have historically provided approximately 82.9% of total
revenues. Because of the prevailing economic environment, full-time equivalent
enrollment declined in both fall 2010 and 2011. The fall 2010 decline of 4.1%
drove a corresponding fall in net tuition revenues in fiscal 2011 of 1.5%.
In fall 2011, the enrollment decline was softer at just 1.4% as the university
began to strategically adjust the distribution of its financial aid awards. This
more moderate enrollment decline was more than offset by the 4.4% increase in
tuition and fees, and as a result, fiscal 2012 net tuition and fees are expected
to show some improvement over fiscal 2011. For the fall 2012 enrollment cycle,
indications show further success from the strategic adjustments, with the total
number of new freshman and transfer students increasing as much as 11%. In
combination with a moderate tuition increase, net tuition revenues should
continue on an upward trajectory for fiscal 2013.
The university's ability to absorb these enrollment shifts while maintaining a
stable operating environment stems from a conservative and informed budget
process. Annual budgets include a variety of contingency reserves, conservative
tuition estimates and analytically driven enrollment assumptions. Fitch views
this carefully managed process to be necessary, given USciences' reliance on
student-generated revenues and high debt burden.
A history of balanced operations has allowed the university to grow and preserve
its balance sheet resources over time. In fiscal 2011, available funds (defined
as cash and investments not permanently restricted), totaled $144.3 million -
just $2.2 million shy of the pre-recession high of $146.5 million recorded in
fiscal 2007. Available funds represented a healthy 165.1% of fiscal 2011
operating expenses ($87.4 million) and a more limited but still adequate 105.7%
of total pro-forma debt obligations ($136.5 million).
The more limited cushion versus pro-forma debt levels is indicative of
USciences' high debt burden. Including the ongoing debt service costs associated
with the series 2012 bonds, pro-forma maximum annual debt service (MADS) will
increase to $8.6 million due in fiscal 2022. Annual obligations are
approximately equal to this level through 2037. As a percentage of adjusted
operating revenues (which include the full policy-driven endowment
distribution), MADS represents 9.6% - a level Fitch views as high. In fiscal
2011, net income available for debt service provided 1.5x coverage of the
pro-forma burden, which is somewhat lower than Fitch would expect for an 'A'
category institution. However, in combination with historically consistent
operations and an adequate balance sheet cushion, Fitch views the burden as
The university was originally founded in 1821 as the Philadelphia College of
Pharmacy. After various expansions, USciences was awarded university status in
1998. Presently, USciences offers academic programming in 22 disciplines across
four colleges and awards both graduate and undergraduate degrees. Further
program expansion is underway that is expected to enhance the university's
position as a premier health sciences institution.