Fitch Affirms Upper Iowa University's Revs at 'BB'; Outlook Stable

Fitch Ratings has affirmed its 'BB' rating on $64.6 million private college facility (PCF) revenue bonds, series 2010 and 2012, issued by the Iowa Higher Education Loan Authority (IHELA) on behalf of Upper Iowa University (UIU).

The Rating Outlook is Stable.

SECURITY

The series 2010 and 2012 bonds are general obligations of the university, payable from all legally available resources. The 2012 bonds are further secured by a first mortgage lien on five campus buildings. Both issues have a debt service reserve.

KEY RATING DRIVERS

OPERATING IMPROVEMENT SUPPORTS RATING: Continued operating improvement, largely driven by expense controls, resulted in essentially break-even operations in fiscal 2015. A small but positive operating margin is projected for fiscal 2016.

IMPROVED COVERAGE: The 'BB' rating reflects UIU meeting the fiscal 2014 and 2015 coverage calculation (per the bond covenants). For fiscal 2015, pledged coverage was 2.26x annual debt service (ADS). Fitch uses a more conservative coverage calculation, maximum annual debt service (MADS) coverage from operating revenues; MADS coverage improved to 1.5x.

STRESSED ENROLLMENT: Overall full-time equivalent (FTE) enrollment declined 11.9% in fall 2015, at both the traditional Fayette campus and for the large on-line and academic center programs. Overall enrollment remains a concern for UIU, which has very high tuition dependence.

SLIM BALANCE SHEET: UIU's balance sheet ratios improved in fiscal 2015 but remain slim and consistent with the 'BB' rating category.

HIGH DEBT BURDEN: Fitch considers UIU's 8.2% MADS burden in fiscal 2015 to be high, particularly given improved but still break-even GAAP operations in 2015. Fitch views UIU as having no new debt capacity at this time.

RATING SENSITIVITIES

FAILURE TO GROW MARGINS: Upper Iowa University's failure to steadily improve GAAP operations and maintain positive MADS coverage from operating revenues would result in a negative rating action.

ADDITIONAL DEBT ISSUANCE: Issuance of additional debt prior to stabilized enrollment and financial operations, or without an increase in resources, would result in a negative rating action.

MANAGE EXPENSES AND ENROLLMENT: UIU's ability to control expenses, grow net tuition revenue, and stabilize enrollment would be viewed favorably, and could support a positive rating action over time.

CREDIT PROFILE

UIU was founded in 1857 in Fayette, Iowa. Fayette is located in north central Iowa, about 37 miles northeast of Waterloo and 65 miles north of Cedar Rapids. The university offers undergraduate and graduate level programming at its residential Fayette campus, 20 educational extension centers mainly in the Midwest, international centers in two countries, and various on-line and self-paced programs.

UIU's multiple education markets add diversity, but are subject to significant competition and recent volatility. The non-traditional on-line and academic center programs (roughly 70% of operating revenue) subsidize full-time undergraduate students on the Fayette campus.

Students attending on-line or at various regional academic centers have six distinct entry points during each academic year, allowing two full-credit courses over an eight-week term, and some student scheduling flexibility. Full-time students at the Fayette campus have a more traditional two-semester calendar.

Slim but Improved Operations

UIU reported essentially break-even GAAP operations in fiscal 2015 (negative $40,000), an improvement from negative $2.6 million in fiscal 2014 (negative 4.8% margin), and negative $8.2 million in fiscal 2013 (negative 15.6% margin). Tight budgets and significant management attention to expense management are expected to continue in fiscal 2016 and 2017. Management projects a modest GAAP operating surplus for the fiscal year ending June 30, 2016.

UIU's revenues are heavily student-fee dependent (97% in fiscal 2015). Net tuition revenue increased about 7% in fiscal 2015, reversing declines in the previous two fiscal years, and supporting the stronger operating performance. However, discounting pressures at the traditional Fayette campus (about a 60% discount) continue to challenge management.

Expense controls largely drove improved operating results in fiscals 2015 and 2014. A large portion of the faculty is part-time and non-tenured, which provides some expense flexibility. The university has made no or limited raises or employer retirement contributions in recent years, which Fitch views as unsustainable long-term. Given enrollment and discount pressures at the traditional Fayette campus, overall UIU operating performance is likely to be driven by the large on-line and academic center programs. The Fayette campus operations are significantly subsidized by the non-traditional academic programs.

More Stable Management

UIU management stabilized in 2015, following significant management turnover since 2013. President Duffy has been in place since 2013, and a new provost since 2014. The current CFO was appointed in July 2014, and is the fourth person in this position since about 2013.

The admissions function continues to see changes. An interim Vice President for Enrollment Services for UIU was appointed in 2015, and that position now reports directly to the president (instead of the provost).

IMPROVED DEBT SERVICE COVERAGE

UIU's bond covenants include a 1.25x annual debt service (ADS) coverage covenant, which was not achieved in 2013 but was in 2014 and 2015 (and is expected to be met in 2016). ADS coverage - as calculated per bond covenants - was 2.26x in fiscal 2015, and 1.45x in fiscal 2014.

Fitch uses a more conservative coverage calculation based on net operating revenue (rather than gross net revenue including non-operating operations), and MADS instead of ADS. This is relevant to UIU, which has an increasing debt structure: $4.3 million was due in 2015, and MADS of $4.7 million occurs in 2016 and remains level thereafter. MADS coverage in fiscal 2015, as calculated by Fitch, improved to 1.5x, up from 0.87x in fiscal 2014 and negative 0.44x in 2013.

Weak Balance Sheet

UIU's available funds (AF; defined by Fitch as cash and investments less permanently restricted net assets) improved to $21.6 million at fiscal year-end 2015, up from $13.8 million in 2014. This equaled a slim 37% of expenses and 29% of debt, levels that remain consistent with the 'BB' rating category.

Stressed Enrollment

FTE enrollment at fall 2015 fell 11.9% overall at UIU, following a 5.5% decline in fall 2014. University-wide FTE was 4,435, a contrast to about 5,500 in both fall 2011 and 2010. The decline was related to the on-line and academic center enrollment (EU, which represents about 80% of UIU's enrollment) as well as the smaller traditional Fayette campus. At Fayette (fall 2015 headcount of 872), management reports declines were largely due to a discontinued international recruitment contract and continued regional competition. Student retention remains weak at Fayette, another management focus.

For the EU component (fall 2015 headcount of 3,657 primarily older, non-traditional students), there is continued price competition as well as economic counter-cyclicality in enrollment. The University reports it is focusing on enrollment management and retention for all delivery systems. EU students include about 17% students who are military or military families.

High Debt Leverage

UIU debt totaled $74.5 million at June 30, 2015, including $9 million of leases and $65.5 million bonds. UIU's operating leases are primarily related to its various academic sites. The bonds are fixed rate and, starting in fiscal 2016, essentially have level debt service. MADS burden remained high in fiscal 2015 at 8.2%, but has moderated slightly over time. At this time, Fitch does not view UIU as having additional debt capacity at the current rating.

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

Applicable Criteria

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

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

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

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=995365

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995365

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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