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Fitch Affirms Barry University, FL's Revs at 'BBB'; Outlook Revised to Negative
[October 21, 2016]

Fitch Affirms Barry University, FL's Revs at 'BBB'; Outlook Revised to Negative


Fitch Ratings has affirmed the 'BBB' rating on approximately $67.3 million of outstanding Pinellas County Educational Facilities Authority, FL (PCEFA) revenue and refunding bonds series 2011 and series 2012, issued on behalf of Barry University (Barry).

The Rating Outlook is revised to Negative from Stable.

SECURITY

Bonds are a general obligation of Barry, further supported by a cash-funded debt service reserve.

KEY RATING DRIVERS

PERSISTENT DECLINE IN ENROLLMENT: The Outlook revision to Negative is based on a continuing trend of a decline in enrollment, which has historically fallen short of budgeted expectations. The enrollment decline is leading to an expected negative $17.5 million variance in budgeted revenues and just under a $4.4 million operating deficit ($1.9 million deficit, excluding one-time items) for fiscal year-end June 30, 2016 (unaudited). The fiscal 2016 audit is not yet available.

TUITION DEPENDENT: Barry is heavily reliant on tuition revenues for over 90% of its total revenues and has limited pricing flexibility due to strong competition for students and affordability concerns. Net tuition revenues continue to decline as a result of under-budget enrollment and increased tuition discounting.

ADEQUATE BALANCE SHEET: Barry's available funds of $57.6 million represented 36.5% of operating expenses and 73% of long-term debt as of year-end June 30, 2015. These balance sheet ratios remain adequate for the rating category; however, Fitch notes with some concern that management reports a liquidity decline of $10.1 million as a result of ongoing capital spending, as well as the anticipated operating deficit in fiscal 2016.

RATING SENSITIVITIES

REVIEW OF COST STRUCTURE: Barry University's management is currently undergoing a review of its entire cost structure in an effort to achieve breakeven operations for fiscal 2017. Fitch will update the rating when the fiscal 2016 audit and financial improvement plan is available. The failure to achieve breakeven operations in fiscal 2017 would likely result in negative rating action.

CONTINUED EROSION OF LIQUIDITY: Management reports that available funds will weaken by about 18% in fiscal 2016 from $57.6 million in fiscal 2015. Continued declines in liquidity metrics would likely result in a downgrade.

CREDIT PROFILE

Barry was founded by the Dominican Sisters in 1940 as a women's Catholic college, became co-educational in 1975 and was elevated to university status in 1981. The university is located on 125 acres in Miami Shores, FL and offers more than 100 bachelors, masters and doctoral degrees.

In addition, the university manages a law school on a separate 24-acre campus in Orlando, FL, and offers 25 sites and multiple additional points of delivery throughout the State of Florida, the Bahamas and the U.S. Virgin Islands.

MISSING ENROLLMENT TARGETS

Barry missed its budgeted enrollment target for the fourth consecutive year in fall 2016, by 567 students. Declines were experienced in the traditional undergraduate and graduate level, as well as in the non-traditional cohort. Total headcount enrollment totaled 7,404 in fall 2016, a decline of 7.1% from the previous year, following a roughly 6% enrollment decline in fall 2015.

The smaller incoming class is partly due to Barry's ongoing emphasis on recruiting students who can persist both academically and financially. However, competition for Barry's prospective student body has also become more acute. Management indicated that the Florida state college system, which now offers certain four-year degree programs, increases the competition for transfer students. Coupled with weakening demographics driving an increase in national competition for students, there is increasing uncertainty around Barry's demand profile and its ability to recruit new students at historical levels.

OPERATING DEFICIT

After 10 consecutive years of operating surpluses, Barry is expecting to post a roughly $4.4 million operating deficit for fiscal 2016, due to enrollment coming in under budget. The expected deficit declines to negative $1.4 million when one-time items are excluded. These one-time items are comprised primarily of expenses related to a voluntary separation program, as well as Barry's 75th anniversary celebration and the start of a critical needs campaign, all of which were Board-approved.

Because of its pressured competitive environment, Barry's flexibility to close the deficit from the revenue side is very limited. Based on management reports, the tuition discounting rate increased is expected to increase to 29.8% in fiscal 2016 from 25.6% in fiscal 2015 and 27% in fiscal 2014, all of which are higher than the 'BBB'-rated median of 18.8%. Barry is dependent on tuition for over 90% of its revenue.

Therefore, management is undertaking a review of Barry's entire cost structure, including programmatic offerings, for saving opportunities with the goal of returning the university to breakeven operations in fiscal 2017 and bolstering debt service coverage. Management's recommendations will be presented to the Board at their meeting scheduled for the end of October. The failure to achieve breakeven operations in fiscal 2017 would likely result in negative rating action.

WEAKENED DEBT PROFILE

Based on information provided by Barry, the expected operating deficit will cause maximum annual debt service (MADS) coverage to decline to just about sum sufficient at 1.05x in fiscal 2016 from 2.6x in fiscal 2015. arry has a rate covenant of 1.1x on annual debt service, however, a covenant violation does not result in an event of default as long as Barry diligently pursues corrective action.



MADS burden is expected to weaken as well, but remains adequate for the rating category at an estimated 4.3% in fiscal 2016, compared to 3.8% in fiscal 2015.

ADEQUATE BUT WEAKENED LIQUIDITY


Barry's available funds of $57.6 million represented 36.5% of operating expenses and 73% of long-term debt as of year-end June 30, 2015. These balance sheet ratios remain adequate for the rating category; however, Fitch notes with some concern that management reports an anticipated liquidity decline of $10.4 million as a result of capital spending, in addition to the expected operating deficit in fiscal 2016. Continued declines in liquidity metrics would likely result in a downgrade.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. College and University Rating Criteria (pub. 12 May 2014)

https://www.fitchratings.com/site/re/748013

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013522

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013522

Endorsement Policy

https://www.fitchratings.com/regulatory

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