OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on \$50.3 million of California Educational Facilities Authority (CEFA) revenue bonds, series 2007A and 2008A, issued on behalf of Claremont Graduate University (CGU).

The Rating Outlook has been revised to Negative from Stable.

SECURITY

CGU's payment obligations pursuant to a loan agreement with CEFA are unsecured, general obligations of the university.

KEY RATING DRIVERS

NEGATIVE OPERATING MARGINS: The Negative Outlook reflects CGU's continued structural imbalance stemming, in part, from enrollment pressure. Fiscal 2014 marked the third consecutive year of negative GAAP-based operating margins and forecast margins remain negative for the current and next fiscal year.

MEANINGFUL BALANCE SHEET FLEXIBILITY: Strong and growing balance sheet resources provide considerable flexibility to manage negative margins for an interim period and support the rating at the current level. The fiscal 2014 ratios of available funds to operating expenses and long-term debt compare favorably to similarly-rated institutions at 111% and 133%, respectively.

PRESSURED ENROLLMENT: Enrollment declines and budgetary shortfalls in each of fiscal 2014 and 2015 (forecast) driving operating deficits likely coincide with improving labor market conditions, a unique sensitivity CGU faces as a graduate university. Enrollment fell by 4.7% and 6%, respectively, during these fiscal years.

PROACTIVE EFFORTS: Meaningful cost reductions and academic realignments in recent years are a positive indication of management's efforts to improve CGU's financial operations. The university has not addressed deficits solely with balance sheet resources.

SOLID MARKET POSITION: CGU's affiliation with the Claremont Colleges and niche as a graduate university focusing on interdisciplinary academic programs and research support its market position over the longer term.

RATING SENSITIVITIES

WEAKENED FINANCIAL CONDITION: CGU's inability to restore structurally balanced financial operations by fiscal 2017, as currently planned, would likely lead to negative rating action.

BALANCE SHEET WEAKNESS: Any material weakening of balance sheet resources, CGU's foremost rating strength, would pressure the rating.

CREDIT PROFILE

Founded in 1925, CGU is a graduate institution located in Claremont, CA, approximately 45 miles east of Los Angeles. The university is part of the Claremont Colleges, a group of seven independent colleges and universities on contiguous campuses in Claremont. CGU most recently completed its reaccreditation with the Western Association of Schools and Colleges in July 2014.

CGU's president, Deborah Freund, announced in December 2014 that she will not seek a second term. The university will transition the role effective July 1 to its current chair of the board of trustee's business and finance committee, Bob Shult, who will assume the role for an interim, three-year period. CGU expects to continue the same strategic initiatives currently in place during Mr. Shult's tenure.

CHALLENGED OPERATING MARGINS

Negative GAAP-based operating margins drive the Negative Outlook. Management has been proactive in reducing operating expenses and realigning academic programs to limit the extent of structural imbalance. Nevertheless, declining enrollment trends and budgeted enrollment shortfalls have materially strained the university's operating position. Enrollment declines likely coinciding with improving labor market conditions are a unique sensitivity CGU faces as a graduate university and a significant rating concern.

CGU's operating margins have averaged -5.2% since fiscal 2012, including -6.7% in fiscal 2014. Not before fiscal 2017 does CGU expect breakeven operations. Approximately \$1.5 million and \$3 million of administrative and other reductions in fiscal 2015 and planned for fiscal 2016, respectively, should go some way toward improving CGU's structural balance. Moreover, CGU has eliminated five doctoral and six masters programs and expanded others to adapt to changing student demand.

Restoring growth to 1,400 full-time equivalent enrollment is part of CGU's five-year strategic plan; CGU's fiscal 2015 enrollment totaled 1,146, a decrease from 1,219 the prior year. CGU has hired an enrollment consulting firm as an advisor.

MEANINGFUL BALANCE SHEET FLEXIBILITY

Strong and growing balance sheet resources provide the university significant financial flexibility and continue to support the rating at the current level. However, structural imbalances and enrollment declines beyond fiscal 2016, suggesting more fundamental and enduring pressures, would likely yield negative rating action.

Available funds, defined by Fitch as cash and investments not permanently restricted, improved to \$76.3 million in fiscal 2014. Such balances have grown by \$20 million, or 35%, since fiscal 2012; investment returns that continued through February 2015 propelled the gains. Available funds covered fiscal 2014 operating expenses and long-term debt by a strong 111% and 133%, respectively.

The university's investment portfolio includes significant exposure to alternative asset classes, which limits the ability to liquidate financial instruments. Available funds adjusted for these asset classes covered fiscal 2014 operating expenses and long-term debt by a still adequate 64.5% and 77.2%, respectively.

GOOD CAPACITY TO REPAY DEBT

The university remains in a good position to meet its long-term debt obligations, despite failing to achieve 1x annual debt service coverage in recent years. Annual debt service coverage averaging 0.9x since fiscal 2010 suggests no material reliance on the balance sheet for purposes of debt repayment.

The maximum annual debt service burden is moderate at 5.8%. All of the university's bonded debt is in fixed-rate form, which provides added certainty during the budgeting process. In addition, CGU has no additional debt-financing plans. A campus master plan under development includes approximately \$120 million of projects over a 20-year period.