OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB-' rating on approximately \$4.56 million of Wallis Higher Education Facilities Corporation tax exempt and taxable education revenue bonds issued on behalf of the University of St. Thomas (UST).

The Rating Outlook is Stable.

SECURITY
The bonds are a general obligation of the university.

KEY RATING DRIVERS

FISCAL 2014 OPERATING STRESS: UST registered its first operating loss in the last five fiscal years (\$2.3 million) in fiscal 2014 (June 30; audited), which translated into a negative 3.7% adjusted operating margin. Management attributed the decline to several factors such as higher medical claims and legal expenses (\$500,000), along with a \$1.5 million shortfall in annual giving.

MIXED ENROLLMENT TRENDS: Fall 2014 total FTE undergraduate enrollment of 1,398 is 1.2% above fall 2013, which represents a fourth consecutive year of increases. However, total FTE graduate enrollment declined for a fourth straight year as a majority of the year-over-year decrease again occurred within the Masters of Education (MED) programs.

MANAGEABLE DEBT BURDEN: UST regularly generates a sufficient level of net income from operations to cover annual debt service. The manageability of UST's debt burden is contingent on the successful refinancing of a currently outstanding \$10 million real estate loan (the loan) coming due in fall 2015. Fitch notes positively that management has successfully refinanced the same loan in the past.

CAPITAL IMPROVEMENT PLAN: Management intends to build a new Center for Sciences and Health Professions (CSHP) building on campus, which is expected to cost approximately \$47 million. UST anticipates funding the project primarily from fundraising with possible bridge financing for pledges. Project construction is expected to begin in late 2015, and Fitch will review any financing plans at the appropriate time.

RATING SENSITIVITIES

PRESSURED OPERATING PERFORMANCE: Management projects a balanced budget for fiscal 2015, which Fitch expects UST to achieve. UST's lack of successfully meeting this year-end budgeted goal may cause negative rating pressure.

PENDING DEBT RESTRUCTURING: Inability to successfully manage the expiration of the loan obligation could strain the university's unencumbered financial resources.

CREDIT PROFILE
Founded in 1947 by the Basilian Fathers, UST is the only Catholic Liberal Arts University in Houston and is located in Houston's Museum District, near the Galleria and Texas Medical Center. The university is accredited by the Southern Association of Colleges and Universities (SACS), which was most recently affirmed in 2005 for a 10-year term, and UST is currently in the midst of the reaccreditation process.

FISCAL 2014 OPERATING DECLINE
In fiscal 2014 UST had a negative 8.8% operating margin and negative 3.7% operating margin when adjusted for endowment payout, which is down from the prior year's positive 0.9% adjusted operating margin. Fiscal 2014 was the first time in the last five years the university recorded a loss from operations. Management attributed the decline to several factors such as higher medical claims and legal expenses (\$500,000), along with a \$1.5 million shortfall in annual giving. Additionally, net tuition and fee revenue was flat in 2014, which also contributed to the operating decline. The flat net tuition and fee revenue is due to increased tuition discounting in relation to UST's competitive pressure.

Management projects the university to have a cash basis surplus in fiscal 2015 but negative GAAP-based performance when incorporating depreciation, amortization, and interest. In fiscal 2015 management implemented several expense curtailment initiatives, which has supported the return to performance consistent with historical levels. Despite not budgeting for the full depreciation expense, Fitch notes that the management team regularly monitors and addresses the university's most pressing deferred maintenance needs and has demonstrated some success in fundraising to support capital projects.

IMPROVED BALANCE SHEET METRICS
Favorable investment returns and solid fundraising has continued to drive meaningful growth in the UST's available funds (AF). As of June 30, 2014, available funds, defined by Fitch as cash and investments not permanently restricted, totaled \$31.2 million, which illustrated a fifth consecutive year of improvement (\$6.6 million of available funds in fiscal year-end 2010) and covered fiscal 2014 operating expenses (\$65 million) by an adequate 48.1% and long-term debt (\$34.8 million) by a solid 100.6%. However, management has been accumulating funds for the construction of the university's CSHP building and Fitch anticipates UST's AF to drop as project construction proceeds.

MIXED ENROLLMENT TRENDS
Undergraduate headcount increased slightly through fall 2014 to 1,645, up from fall 2013's 1,610 (2.2% increase). Undergraduate enrollment was largely supported by a freshmen-to-sophomore retention rate of 88%, which is stronger than historical levels (77% in 2013). Further, relative stability in undergraduate enrollment growth continues to benefit from a solid number of new transfer matriculants (168 in fall 2014 relative to an average of 160 over the past six years).

Overall, Fitch views UST's total enrollment picture as stable, but notes the university is located in a competitive region. In fall 2014 total FTE enrollment was 2,249 (approximately 63% undergraduate and 37% graduate), which was down 1.2% from fall 2013's 2,277.

MANAGEABLE DEBT BURDEN
UST's maximum annual debt service (MADS) of approximately \$12 million, which includes a \$9.9 million bullet maturity on the loan, represented a very high 19.1% of fiscal 2014 unrestricted operating revenues (adjusted for full endowment payout). Due to the structure of the university's debt portfolio, Fitch believes average annual debt service (AADS) is a better representation of UST's leverage position. AADS represented a moderate 4.1% of fiscal 2014 unrestricted operating revenues and fiscal 2014 net operating income yielded adequate AADS coverage (1.5x). Furthermore, the university was able to cover MADS utilizing fiscal year-end 2014 available funds by 2.6x.

As indicated in Fitch's prior credit reviews of UST, management plans to refinance the outstanding loan, which matures on Sept. 1, 2015. Fitch notes positively that the university has successfully refinanced the same loan in the past.

CAPITAL SPENDING PLAN
Management intends to build a new Center for Sciences and Health Professions building on campus, which is expected to cost approximately \$47 million. Management intends to fund the project entirely with fundraising proceeds, and may pursue bridge financing to cover pledges. To date, UST has raised approximately \$32 million for the project (approximately \$14.1 in pledges), which Fitch views favorably. Construction for CSHP is estimated to take 18 months and is expected to begin in late 2015. Fitch will monitor construction progress and would view unfavorably any significant cost overruns and/or construction delays.