Fitch Affirms Webster University (MO) Revs at 'A'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A' rating on approximately $$62.5 million of outstanding Missouri Health and Educational Facilities Authority revenue bonds issued on behalf of Webster University (Webster, or the university).

The Rating Outlook is Stable.

SECURITY:

The bonds are secured by a gross revenue pledge, mortgage on certain facilities, and a cash-funded debt service reserve fund.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'A' rating primarily reflects Webster's diverse market position and various delivery models, largely positive operating history driving strong balance sheet resources, low debt burden and historically strong coverage levels. Counterbalancing factors include Webster's significant reliance on student-generated revenues and material exposure to the historically volatile non-traditional student population, which has pressured operating margins.

ENROLLMENT CHALLENGES: Webster's traditional undergraduate enrollment is generally stable, while high exposure to non-traditional students served at satellite campuses domestically and abroad and a highly competitive student market threatens stability of student-generated tuition revenues. A significant enrollment budget shortfall in fiscal 2015 is reflected in a third year of reduced net tuition revenues and increasing institutional aid, which has weakened Webster's operating performance.

MARGIN DETERIORATION: Although consistently positive for over a decade, margin trends have declined in recent years. Fiscal 2015 is expected to result in a negative margin due to investments in strategic initiatives, though slightly positive margins are budgeted for fiscal 2016 and thereafter. Fitch expects that strong management of this complex operation with multiple, but flexible, business models and effective expense management will help in restoring balance. The college is also exposed to foreign currency risk as a result of its large international presence.

STRONG FINANCIAL CUSHION: Webster's balance sheet resources relative to operating expenses and long-term debt remain adequate to strong in fiscal 2014, providing a solid level of financial flexibility that is consistent with the 'A' rating level and offsets the college's weaker margins.

MANAGEABLE DEBT BURDEN: Maximum annual debt service (MADS) consumes a low-to-moderate percentage of annual operating revenues which is supported by historically strong debt service coverage from operations. The presence of near-term debt plans presents concern given the narrowing margins which could lead to reduced coverage levels in future years.

RATING SENSITIVITIES

DEMAND SHIFTS: Given the strong correlation between enrollment and student-related revenues, the rating is sensitive to a material shift in student demand which drives operating performance.

OPERATING IMBALANCE: Sustained growth of financial resources is dependent on Webster's ability to maintain operating surpluses. Operating improvement is expected in fiscal 2016 that will lead to margin improvement in fiscal 2017. Failure to incrementally improve margins could lead to negative rating action.

CREDIT PROFILE:

Webster, originally founded in 1915, is an international, multi-campus private university with its main campus in Webster Groves, MO. It offers degree programs at metropolitan and military centers in 20 states throughout the U.S., at 10 international sites, as well as online. The university's diverse student base includes traditional students at its main campus and non-traditional students via regional, international and online venues.

HIGH TUITION DEPENDENCY

The university's operating success is closely tied to student-generated revenues raising concern over revenue concentration. This is somewhat mitigated by the mix of traditional and non-traditional student headcount. Student-generated income comprised a very high 94.2% of total fiscal 2014 unrestricted operating revenues. While not uncommon for private higher education institutions, this concentration emphasizes the university's need to sustain demand and carefully manage enrollment levels, particularly given the high level of graduate, non-traditional students (74% of total headcount) enrolled at the university's satellite campuses around the country and the world. Webster's traditional undergraduate students, the majority of which are enrolled at the main campus, comprise the remaining 26%. Traditional headcount is stable, featuring a moderately low growth rate of 0.9% over the past five enrollment cycles (fall 2010-2014).

The non-traditional student cohort has historically experienced more enrollment volatility than its traditional counterpart, with non-traditional demand and enrollment more vulnerable to shifts in the economy. However, some level of diversity exists within the highly concentrated student-generated revenue stream. Graduate enrollment at the main campus, extended sites and military comprise approximately 7%, 17% and 11% of revenues, respectively, with on-line enrollment making up about 20%. Fitch views positively Webster's significant operating flexibility with regard to opening and closing its satellite campuses, which also serves to mitigate some of the concerns regarding the volatility of the non-traditional student cohort.

WEAKENED OPERATIONS

Margins continue to decline from historically high levels, though Webster's operations improved in fiscal 2014 to 4.3%, compared to 3% in fiscal 2013. After making the necessary cost adjustments, the current fiscal 2014 margin is slightly below internal target of 5%, including depreciation.

Forecasts for fiscal 2015 presented to Fitch reflect a significant revenue shortfall, with net tuition revenue expected to be 18.2% below budget due to declining enrollment and increased institutional aid requirements. Further, given its large international presence, Webster experienced losses on foreign currency exchange as a result of the weakening Euro which exposes it to foreign currency risk.

Webster's unaudited forecast for fiscal 2015 is $6.9 million below budget, and operations are expected to be negative 2% on a full accrual basis, compared to its adjusted budgeted margin of 4.1%, after accounting for presidential strategic initiatives of $8 million. The fiscal 2016 budget reflects a surplus of $2 million or a 1% operating margin, after significant cost cutting efforts are implemented. Favorably, management conservatively budgets for depreciation and has set aside a contingency reserve.

Fitch will monitor management's ability to achieved budgeted enrollment goals and achieve the expense savings necessary to return to positive operations in fiscal 2016. Failure to incrementally improve margins could lead to negative rating action.

STRONG FINANCIAL CUSHION

Webster's consistent surpluses in previous years have allowed it to add to its financial cushion. Webster's available funds (defined by Fitch as cash and investments not permanently restricted) have grown a total of 5.1% over the past year to $230 million. Available funds represent an adequate 115.7% of total operating expenses and a strong 225.7% of total pro forma debt, including about $25 million in addition debt expected to be issued in August 2015, which is in-line with expectations for the 'A' category.

MANAGEABLE DEBT PROFILE

The prudent financial and capital planning exhibited by the management team has allowed the university to fund capital projects from the operating budget and has contributed to the maintenance of a moderately low debt burden. Webster's maximum annual debt service (MADS) of $9.9 million due in fiscal 2016 (not including additional debt plans) comprises a moderately low 4.8% of total operating revenues.

MADS coverage from fiscal 2014 operations is weaker than prior years at 2.4x due to tighter margins. The series 2011 fixed-rate bonds currently represent 100% of the university's bond-related debt obligations. A private placement is contemplated for early fiscal 2016 which could drive lower coverage based on expectations of weaker fiscal 2015 operating results. The additional debt will fund the construction and equipping of an academic building on the university's main campus.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria' (June 16, 2014);

--'U.S. College and University Rating Criteria' (May 12, 2014);

--'Fitch Affirms Webster University (MO) Revs at 'A'; Outlook Stable', dated May 28, 2013.

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985263

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Fitch Ratings
Primary Analyst
Nancy Faingar Moore
Director
+1 212-908-0725
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Colin Walsh
Director
+1 212-908-0767
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1 212-908-0738
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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