Fitch Ratings has assigned a 'BBB' rating to $22 million of private
college facility (PCF) revenue bonds, series 2012, issued by the Iowa
Higher Education Loan Authority (IHELA) on behalf of Upper Iowa
University (UIU, or the university).
The series 2012 bond proceeds will fund the construction and equipping
of two new residence halls, various infrastructure improvements, costs
of issuance, capitalized interest and a debt service reserve.
In addition, Fitch affirms the rating on $43.985 million outstanding
IHELA PCF revenue bonds at 'BBB'.
The Rating Outlook is revised to Negative from Stable.
The bonds are a general obligation of the university, payable from all
legally available resources.
KEY RATING DRIVERS
AGGRESSIVE PROJECTIONS UNDERPIN REBOUND: The Negative Outlook reflects
Fitch's view that the projections to return UIU's financial performance
to the historically positive levels that underpin the 'BBB' rating are
aggressive. Fitch notes that a combination of careful expense management
and increases in both enrollment and tuition rates are required to meet
the necessary benchmarks, and failure in any of these areas could
compromise near-term recovery.
OPERATIONAL FLEXIBILITY COMPROMISED: The trend of operating surpluses
was discontinued in fiscal 2012 as the university produced a 3.7%
deficit. Though improvement is expected, UIU's cash-basis budgeting will
likely result in modestly negative operating results through fiscal 2014.
DEBT AFFORDABILITY LINKED TO IMPROVEMENT: Fitch has historically
considered UIU's moderately high debt burden manageable given the cash
flow available to service annual obligations. Improvements in fiscal
2013, as compared to fiscal 2012, are required to maintain adequate cash
flow coverage to support this key credit characteristic.
STABILIZING ENROLLMENT: After some enrollment volatility during the
2011-12 academic year contributed to below-budget revenue generation in
fiscal 2012, UIU's enrollment levels have rebounded in fall 2012,
providing support for the somewhat improved financial results expected
in fiscal 2013.
WHAT COULD TRIGGER A RATING ACTION
INABILITY TO ACHIEVE PROJECTIONS: Failure on the part of UIU to achieve
projected incremental financial operating improvements in each of the
next four fiscal years, culminating in solidly positive margin by fiscal
2016, will likely trigger negative rating action.
ADDITIONAL DEBT ISSUANCE: The issuance of additional revenue bonds prior
to the stabilization of financial operating performance and without a
corresponding increase in resources available for repayment could result
in negative rating action.
The Negative Outlook indicates recently weakened financial performance
in fiscal 2012 and the aggressive nature of the projections that
underpin recovery in the near term. In fiscal 2012, a combination of
factors resulted in an operating deficit of 3.7% as compared to an
average surplus of 5.8% in the prior five fiscal years (2007 - 2011).
The primary issues included weakened non-traditional enrollment as the
university transitioned to a new, more centralized enrollment process,
booking certain accrual-based liabilities and increasing depreciation
Some of the issues that drove the deficit have been addressed for fiscal
2013, including enrollment growth consistent with budgeted expectations
and incorporating the expense methodology implemented in fiscal 2012;
however, the university is still projecting a modest GAAP-basis deficit.
The lack of financial flexibility that will characterize UIU during the
multi-year recovery period creates a significant credit concern,
particularly given the university's limited balance sheet cushion and
somewhat high debt burden. Fitch considers the Negative Outlook as
appropriate to encapsulate real potential for negative rating action
should the university fail to achieve incremental annual improvement in
the immediate term.
UIU provided Fitch with projections which contemplate a return to
solidly positive operating results by fiscal 2016. The recovery requires
solid increases in student-generated revenues and stringent expense
management practices. The growth in student generated revenues is
predicated on growing enrollment by 3% per year and escalating tuition
by approximately 3% annually. Expense growth must be monitored
diligently given that annual operating expenses have grown by an average
of 13.5% in each of the last five fiscal years. Further, depreciation
expense will increase in fiscal 2014 and 2015 as the university's
debt-financed capital projects are brought online. Fitch views these
assumptions as aggressive, and notes that shortfalls in any of these
areas could result in negative rating action.
UIU was founded in 1857 in Fayette, Iowa. The university offers both
undergraduate and graduate level programming at its residential Fayette
campus, 20 educational extension centers in the Midwest, three
international campuses, and a distance education center. UIU's use of
multiple education delivery modalities is viewed favorably, as demand
for the different modalities is not correlated. With six distinct
starting points during each academic year, students take two full-credit
courses over eight-week terms, providing flexibility to meet degree
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:
--'Fitch Withdraws Iowa Higher Ed Loan Auth (IA) (Upper Iowa U.) Private
College Facilities Revs', dated Oct 4, 2012
--'Upper Iowa University', dated July 30, 2012
'Fitch Rates Upper Iowa University's Revs 'BBB'; Outlook Stable', July
--'Rating Criteria', dated June 12, 2012
--'U.S. College and University Rating Criteria', dated May 25, 2012
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria
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