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. SECURITY 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. CREDIT PROFILE 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 manageable. 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.