[February 07, 2014]

Fitch Affirms Xavier University, OH Revs at 'A-'; Outlook Revised to Stable

Fitch Ratings affirms the 'A-' rating on approximately $99.2 million of outstanding Ohio Higher Educational Facility Commission (OHEFC) revenue bonds series 2008C and series 2010 issued on behalf of Xavier University (Xavier, or the university).

The Rating Outlook is revised to Stable from Negative.

SECURITY

The bonds are secured by all legally available and unencumbered funds of the university.

KEY RATING DRIVERS

REVISED OUTLOOK REFLECTS PROGRESS: The revised Outlook reflects Xavier's modest operating improvement in fiscal 2013 (with expectations that fiscal 2014 margins will be better) and growing financial resources. Overall, Xavier is demonstrating progress towards reaching goals set forth in its strategic financial plan.

STABLE CREDIT CHARACTERISTICS: The 'A-' rating reflects Xavier's stable enrollment, established market position, healthy annual fundraising, ability to service outstanding debt from operations and lack of additional debt plans near-term. Counterbalancing factors include persistent challenges in graduate enrollment, increasing student aid needs driven by the competitive operating environment, and significant exposure to variable rate debt and its related risks.

GROWING FINANCIAL AID NEEDS: Institutional aid has continued to grow to its highest level in fiscal 2013. Despite these high levels, net tuition revenue growth was slightly positive, after a dip in the prior year. The improvement is the result of a tuition rate increase and growth in the full-time undergraduate cohort in fall 2012, which partly offset declining graduate enrollment.

PROACTIVE MANAGEMENT TEAM: The impact of Xavier's tuition revenue shortfall is actively managed, in part, through significant expense reductions. Management plans to continue to mitigate the financial impact of decreasing graduate enrollment and higher student aid requirements with revenue development and continued cost cutting efforts.

RATING SENSITIVITY

MARGIN STABILITY: Fitch expects gradual operating improvement starting with fiscal 2014, leading to positive operating surplus and growth in financial resources over the next several years. Failure to restore and stabilize margins would likely result in a rating change.

ADDITIONAL LEVERAGE: Incurrence of additional debt without a commensurate increase in available financial resources or sustained operating improvement could stress the university's financial cushion.

CREDIT PROFILE

Xavier, founded in 1831, is a private, co-educational Jesuit institution located in Cincinnati, Ohio. The university successfully opened its Hoff Academic Quad in fall 2010, which includes two major academic buildings. A new student housing and dining complex opened on schedule in fall 2011, completing a significant makeover of the university's physical plant. A new $54 million multi-purpose project located adjacent to campus is under construction. The development is entirely funded and operated by third parties.

PROGRESS IN ACHIEVING FINANCIAL STABILITY

After projecting a revenue shortfall for fiscal 2013, Xavier ended fiscal 2013 with a modest operating surplus of $1.4 million (or 0.6%) on an adjusted basis of $1.4 million, including a modest amount of endowment spending, compared to $1.23 million (or 0.4%) in fiscal 2012. Management made the necessary expense adjustments of nearly $3.5 million to achieve the positive results. Xavier's strategic financial plan for fiscal 2014 to fiscal 2020 sets forth general planning goals which demonstrate management's willingness to improve operations.

After projecting a revenue shortfall for fiscal 2013, Xavier ended fiscal 2013 with a modest operating surplus on an adjusted basis, including endowment spending, of $1.4 million (or 0.6%), compared to $1.23 million (or 0.4%) in fiscal 2012. Management made the necessary expense adjustments of nearly $3.5 million to achieve the positive results. Xavier's strategic financial plan for fiscal 2014 to fiscal 2020 sets forth general planning goals which demonstrate management's willingness to improve operations.

For the six-month interim period ending Dec. 31, 2013, operating revenues exceeded operating expenses by $2.1 million despite a shortfall in graduate tuition relative to plan. Tuition and fee revenues for the six-month period were $1.6 million lower than expected due to lower enrollments in graduate programs, notably the MBA and master in education. Higher than expected investment returns, auxiliary, non-tuition revenue sources and expense reduction efforts contributed to the positive interim results.

Although Xavier's discounting rate for the six-month period was higher at 38% compared to 36.5% at June 30, 2013, auxiliary revenues were stable and slightly outperformed budget as a result of undergraduate enrollment over-achieving pln. In addition, gift revenue slightly improved for the period, and other revenues, consisting of facility rentals and certificate-based and executive education programs, also modestly exceeded expectations for the six months.

Xavier's ongoing expense reduction efforts, which included a significant reduction in workforce in July 2013, have further contributed to the positive interim results. Management's recommended fiscal 2015 budget, which will be considered by the Board of Trustees on Feb. 21, is balanced and provides $4.5 million in additional funds for strategic initiatives and new academic programs.

Xavier has made the necessary adjustments in their fiscal 2014 expenditure plan to achieve positive results which support the Outlook revision. However, Fitch believes that Xavier still faces some challenges in its effort to achieve financial stability due to its high tuition discounting rate. Fitch will monitor Xavier's ability to gradually improve its operating margin and make budgeted transfers to reserves each year which are needed to add to the financial strength of the university. The inability to generate surplus operating margins that could drive growth in balance sheet resources could lead to a ratings downgrade.

REASONABLE FINANCIAL CUSHION

Xavier's balance sheet is stable and improving. Available funds (defined by Fitch as cash and investments not permanently restricted) increased 15% in fiscal 2013 to $144.7 million from $125.7 million in fiscal 2012. As a result, available funds represent a reasonable financial cushion (87.8% of fiscal 2013 operating expenses and 73.5% of total outstanding debt) which is adequate for Fitch's 'A-' rating.

Fiscal 2013 unrestricted net assets grew 12.1%, after a 9.1% (or $16.8 million) decline in fiscal 2012 unrestricted net assets which was associated with investment losses. The statement of position for the six months ended Dec. 31, 2013 shows improvement in Xavier's balance sheet with an approximately $18 million increase in overall net assets. This increase is driven by market gains on investments and improvement in the interest rate swap valuations.

Fitch will continue to monitor liquidity ratios going forward to ensure that levels are maintained consistent with the 'A-' rating level. The drawdown of liquid resources for proposed capital projects and renovations without future operating surpluses and fundraising success to offset such drawdown could have negative rating implications.

VULNERABLE TO ENROLLMENT SHIFTS

The university's reliance on student-generated revenues (with tuition, fees, and auxiliary revenues accounting for 80% of revenues in fiscal 2013) is not unusual for private colleges, but makes the university susceptible to changes in enrollment from year to year, necessitating close monitoring of demand statistics and enrollment trends. Increasing undergraduate full-time enrollment and increasing competitive pressures since fiscal 2010 have increased reliance on institutional aid.

Overall demand is stabilizing. Benefiting from Xavier's strong brand and diversification of program offerings, Xavier's undergraduate enrollment grew 3.7% in fall 2013, after a 1.2% dip in fall 2012, making it Xavier's largest undergraduate class in history. Favorably, growth in undergraduate enrollment aided in offsetting declining graduate enrollment. As seen nationally by Fitch, Xavier's declining graduate enrollment is mostly attributable to lower demand for the MBA and graduate education programs. Following a 4.2% drop in total headcount enrollment in fall 2012, total enrollment increased a modest 0.3%.

While Xavier overachieved in meeting its undergraduate enrollment budget in fall 2013 by 65 students (1.6% over fiscal 2014 budget), it underachieved in meeting its budget for graduate enrollment, which is based on credit hours. While this is a concern, Xavier was able to accommodate the variation in actual enrollment to budget, due to the availability of flexible resources (faculty teach both undergraduate and graduate classes). Management indicated that the fiscal 2014 spring and summer graduate credit hours are expected to modestly increase over amounts presented to Fitch, which should decrease the shortfall, but they are projecting downward to be conservative.

Xavier continues to be challenged by its competitive operating environment and the state's changing demographics, with the number of high school graduates declining, and is managing appropriately by adding regional recruiters. For fall 2014 (fiscal 2015), management indicates that year-to-date deposits are up 5% for full time undergraduates. Xavier is being reasonably conservative by budgeting for fewer freshmen in fall 2014 than it attained in fall 2013 (1,228 versus 1,282, respectively). Favorably, Xavier is demonstrating the ability to attract new students, without compromising quality. The ability to attract and retain students has positive operating implications for the university.

HIGH BUT MANAGEABLE DEBT BURDEN; REDUCED EXPOSURE TO VRDB

Stable operations in fiscal 2013 provide for adequate 1.8x coverage of pro forma maximum annual debt service (MADS). Pro forma MADS burden is high at 8.1% but manageable given Xavier's lack of additional debt financing plans. Variable-rate debt accounts for 43% of Xavier's outstanding bonds (down from 49%), with the majority hedged through an interest-rate swap. In January 2014, Xavier completed a private placement with a bank to refund its un-hedged variable rate debt in the amount of approximately $20 million. The bank deal matches the original remaining life of the series 2000B bonds and matches the principal amount outstanding. Xavier did not increase its debt but reduced some of the risk of its capital structure. Further, the amortization schedule and covenants remain the same.

Fitch believes the university's debt profile continues to present credit risk. Swap collateral counterparties are monitored closely, and Xavier has not had to post any collateral to date. Fixing a portion of its variable rate debt eliminates not only interest rate risk, but put risk on the debt, as well as renewal and pricing risk on the accompanying letter of credit (LOC), which Fitch views favorably, as LOC fees, remarketing fees and trustee fees are eliminated. At the same time, the university successfully negotiated a reduction in LOC rates and a five-year extension on LOCs supporting its remaining variable rate debt, which Fitch views positively and is a testament to the experienced management team.

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

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria' (May 10, 2013);

--'Fitch Affirms Xavier University. OH Revs at 'A-'; Outlook Revised to Negative (February 15, 2013).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820061

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