|[December 02, 2013]
Fitch Rates Gonzaga University (Washington) Series 2013 Rev Bonds 'A'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings assigns an 'A' rating to the following series of bonds to
be issued by the Washington Higher Education Facilities Authority
(WHEFA) on behalf of Gonzaga University (Gonzaga, or the university):
--$33 million revenue bonds, series 2013A;
--$20 million taxable revenue bonds, series 2013B.
The series 2013 bonds are expected to sell via negotiation as early as
the week of December 9. Bond proceeds will be used to finance
construction of the new University Center facility and other capital
improvements, fund capitalized interest and a possible interest rate
swap termination payment, and pay costs of issuance.
The Rating Outlook is Stable.
Series 2013 bonds, which rank on parity with Gonzaga's approximately
$132.4 million of outstanding WHEFA revenue bonds (as of May 31, 2013),
are a general obligation secured by unrestricted gross revenues of the
university. Additional bondholder protections include a negative pledge
restricting any pledge, lien, or other encumbrance on the university's
core campus (as defined in the Indenture).
KEY RATING DRIVERS
CONSISTENT OPERATING PERFORMANCE: A track record of solid operating
margins, both before and after accounting for endowment distributions,
reflects Gonzaga's relative enrollment stability over the past several
years; management's conservative financial planning and budgeting
practices; and improving fundraising ability. Gonzaga's positive
operating history is tempered by a revenue base that is highly
concentrated in student-related revenues; a common characteristic of
STABLE, YET PRESSURED ENROLLMENT: Gonzaga's enrollment profile has
remained relatively stable over the past several years, although,
similar to many institutions, it has experienced enrollment declines in
certain graduate programs, notably law. While student quality and
selectivity remain sound, modest freshmen matriculation and an
increasing, yet still manageable, discount rate reflect the university's
competitive operating environment.
SOUND FINANCIAL CUSHION: Gonzaga has a sound financial cushion, with
available funds providing adequate coverage of operating expenses and
pro forma debt. The university's financial resources have grown
significantly over the past few years as a result of investment gains,
annual operating surpluses, and growing fundraising levels.
MANAGEABLE, BUT MODERATELY HIGH DEBT BURDEN: Post issuance of the series
2013 revenue bonds, pro forma maximum annual debt service (MADS) grows
to approximately $15 million, or a moderately high 7.8% of fiscal 2013
unrestricted operating revenues. This debt burden is partly offset by
generation of pro forma MADS coverage of nearly 2x, based on net
operating income over the past three fiscal years.
ENROLLMENT STABILITY: Being a tuition-dependent institution, Gonzaga's
operating profile is highly sensitive to enrollment levels. An inability
to effectively manage periodic shifts or material declines in
undergraduate and/or graduate student enrollment could yield negative
ADDITIONAL LEVERAGE: Incurrence of material additional indebtedness
without a commensurate increase in available financial resources would
pressure the university's financial cushion at the current rating level.
Furthermore, the rating assumes ongoing fundraising initiatives will be
successful, thereby improving the level of financial resources.
Gonzaga was founded in 1887 by the Society of Jesus (the Jesuits) and is
affiliated with the Catholic Church through the Jesuit order. It is one
of 28 Jesuit colleges and universities in the U.S. Located on a 131-acre
campus in Spokane, WA, Gonzaga offers 75 undergraduate programs, 26
master's degree programs, and maintains a campus in Florence, Italy for
a student exchange program. It has also operated a host of online
master's degree programs for several years, which has helped increase
the diversity of its student body and offset declines in certain
graduate program enrollment. Gonzaga is accredited by the Northwest
Commission on Colleges and Universities and sponsors nine NCAA Division
I sports teams for both men and women that participate in the West Coast
Fall 2013 headcount enrollment totaled 7,605, down slightly from the
prior year but nearly flat over a five-year period. Full-time equivalent
enrollment (FTE) totaled 7,255, also down slightly from the prior year,
but up 1% over a five-year period. Undergraduate enrollment has been
flat to slightly growing, offset with declines in graduate headcount and
FTEs. Echoing the national trend, law school enrollment declined over
the past few years, although only makes up a small portion of total
enrollment. To date, Gonzaga has managed the law school enrollment
declines effectively, although challenges remain.
Freshmen applications increased year-over-year since fall 2009, partly
due to adoption of the Comon Application. Selectivity has fluctuated
slightly, but remains fairly steady. The fall 2013 acceptance rate was a
solid 68%. Matriculation was a fairly low 25.8%, reflecting Gonzaga's
competitive operating environment, though the fall 2013 entering
freshmen class of 1,238 was about 80 students ahead of plan. Moreover,
student quality remains sound, with the university reporting healthy
freshmen-to-sophomore retention and six-year graduation rates of 94% and
Positive Operations Offset Revenue Concentration
Enrollment stability and conservative budgeting practices on the part of
management have supported Gonzaga's track record of solidly positive
operating margins. The university generated a 6.6% margin in fiscal 2013
(including endowment spending), exceeding the 3.7% average over the
prior five fiscal years (2008-2012). Prior to endowment spending,
Gonzaga's margin was a still solid 4.2%. Fitch views Gonzaga's ability
to generate breakeven to positive margins before endowment spending
favorably as it demonstrates that it is not typically reliant on its
endowment to balance operations.
Gonzaga has reasonably controlled costs in recent years; particularly in
fiscal 2013 when expenses were held mostly flat with the prior year.
This is part attributed to the outsourcing of its bookstore operations,
which resulted in a notable drop in auxiliary-related expenses. Total
operating expenses grew at a modest 2.9% average annual growth rate
(AAGR) since fiscal 2009, compared to operating revenues which grew at a
slightly higher 3.9% AAGR. Using conservative assumptions, budgets are
prepared with a goal of at least a 3% operating margin. As such, Gonzaga
forecasts a positive result for fiscal 2014, though lower than the
fiscal 2013 level, with a targeted goal of a 3% GAAP-based operating
Gonzaga's revenue base is heavily concentrated in student-generated
revenues (tuition, fees and auxiliaries), making up 85.3% of total
unrestricted operating revenues in fiscal 2013. Concentration in
student-related revenues, while common for private colleges and
universities, is partially offset by Gonzaga's relative enrollment
stability over the past several years, with year-over-year growth in net
tuition revenue (4.6% AAGR since fiscal 2009). Moreover, the student
body is somewhat diverse, with traditional undergraduate and graduate
students, and a growing online population.
Sound Financial Cushion
Over the past few years, the combination of operating surpluses and
investment gains helped Gonzaga's financial resources rebound from
losses incurred during the 2008-2009 financial crisis. Available funds,
defined by Fitch as cash and investments not permanently restricted,
totaled $166.1 million as of May 31, 2013, up 31% from the prior year
and nearly triple the level reported as of May 31, 2009. Available funds
covered fiscal 2013 operating expenses ($178.3 million) and pro forma
debt (about $191 million) by a solid 93.2% and 87%, respectively. As of
Oct. 31, 2013, Gonzaga's pooled endowment returned roughly 8% since May
31, 2013 for an estimated market value of $145.6 million. The pooled
endowment represents about 85% of the university's total endowment
The university's investment policy is fairly conservative and includes
guidelines for operating funds, with a focus on liquidity, and endowment
funds, with a longer-term horizon. Similar to many private institutions,
Gonzaga maintains exposure to illiquid, alternative asset classes. These
assets make up about a quarter of its portfolio, which Fitch does not
view as overly aggressive for an endowment of this size. Adjusting for
alternatives, available funds decline to $145.1 million as of May 31,
2013, providing adequate coverage of operations and pro forma debt of
81.4% and 76%, respectively.
Augmenting financial resources and supporting Gonzaga's added leverage
and capital plans is a comprehensive fundraising campaign that is
currently in the quiet phase; approximately $138.5 million raised to
date. Proceeds will support academic programs, financial aid and
capital; primarily the University Center project to be funded with the
series 2013 bonds. Fitch views management's fundraising initiatives in
advance of capital projects favorably and these serve as a partial
offset to liquidity ratios that are low for the 'A' rating level.
High, Yet Manageable Debt Burden
Over the past few years, Gonzaga transitioned its debt portfolio into
more conservative and traditional structures, refunding previously
outstanding auction-rate securities into fixed-rate debt and eliminating
all variable-rate exposure. A private placement in fiscal 2013 (series
2012 bonds) added variable-rate exposure again, but at $10.6 million
accounts for only 7% of pro forma revenue bond debt.
Gonzaga has two interest rate swaps outstanding for a notional value of
$42.9 million. The combined market valuation was negative $6.6 million
as of Oct. 31, 2013, although collateral posting is not presently
required. The larger of the two swaps ($35.5 million) may be terminated
prior to the effective date with proceeds of the series 2013 bonds,
leaving $6.9 million outstanding that will effectively part hedge the
series 2012 bonds. Based on Gonzaga's sound financial cushion and track
record of operating surpluses, Fitch views this modest level of
variable-rate and derivative exposure as manageable for the university.
The university's existing debt schedule is fairly front-loaded, with
about 95% of existing principal to be retired in 16 years (fiscal 2029).
The series 2013A and 2013B bonds have level debt service through fiscal
2029 ($3 million annually), with principal amortization after fiscal
2029. Pro forma MADS on all outstanding debt is fairly level through
fiscal 2029 at $15 million, with expected average annual debt service
(AADS) equating to about $10.7 million.
Gonzaga's debt burden is moderately high, with MADS consuming 7.8% of
fiscal 2013 unrestricted operating revenues ($190.9 million). The AADS
burden is lower at a moderate 5.6%. The debt burden is partly offset by
consistently positive operating results that produce solid debt service
coverage. Fiscal 2013 net operating income of $28.4 million covers MADS
by 1.9x, or AADS by a healthy 2.6x, though these levels may decline
slightly in fiscal 2014 as operations soften from a strong fiscal 2013
While no concrete plans exist at this time, future debt needs
potentially include a multi-disciplinary sciences facility, which
management advised is at least three years out, unless a sizable gift is
received sooner. Gonzaga has a history of fundraising in advance of
capital projects and is expected to continue this practice.
Additionally, about $30 million (16%) of debt principal is expected to
amortize over the next five years, which is viewed favorably as it
provides some headroom for potential future issuance.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 10, 2013).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
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