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Rating Update:

MOODY'S DOWNGRADES WITTENBERG UNIVERSITY'S (OH) RATING TO Ba1 FROM Baa2; OUTLOOK IS NEGATIVE

24 Jun 2011

RATING ACTION IMPACTS $39 MILLION OF RATED DEBT OUTSTANDING

Ohio Higher Educational Facility Commission
Higher Education
OH

Opinion

NEW YORK, Jun 24, 2011 -- Moody's Investors Service has downgraded its long-term rating to Ba1 from Baa2 on Wittenberg University's (Wittenberg) Series 1999, 2001, and 2005 fixed rate Revenue Bonds issued through the Ohio Higher Educational Facility Commission. The rating outlook is negative at the lower rating level.

The downgrade is driven by Wittenberg University's fundamentally imbalanced operating performance and weak cash flow generation, thin balance sheet resources and liquidity, as well as expected continuing enrollment and recruiting challenges that will further constrain net tuition revenue growth. The negative outlook is short-term to await the fiscal year (FY) 2011 financial results and the outcome of the fall 2011 enrollment to assess the impact on operating cash flow and debt service coverage.

SUMMARY RATING RATIONALE

The Ba1 rating for Wittenberg University reflects its sustained imbalanced operating performance and weak cash flow generation, weak balance resources and liquidity and expected continuing enrollment and recruiting challenges that will constrain net tuition growth offset by credit strengths of good operating liquidity and a fixed-rate debt structure. The negative outlook reflects expected continuing enrollment challenges leading to stagnant to declining net tuition revenues from high tuition discounting which will continue to provide operating challenges resulting in weak operating cash flow and debt service coverage.

CHALLENGES

*Insufficient operating cash flow to cover debt service, resulting in Wittenberg utilizing $1.1 million of unrestricted funds to fully meet debt service in FY 2011. The University continues to generate imbalanced operating performance with sustained deep operating deficits, which averaged negative 9.6% annually from FY 2008-FY 2010, as calculated by Moody's including depreciation and other non-cash expenses.

*Declining net tuition revenue in FY 2010, with net tuition revenues of $28.9 million in FY 2010 compared to $30.5 million in FY 2009, which is a meaningful credit challenge as tuition and auxiliaries represent the single largest component of total operating revenues at 73% in FY 2010.

*Weak balance sheet cushion for a second consecutive year with negative unrestricted and expendable financial resources of negative $18.2 million and negative $4.4 million, respectively, as measured by Moody's for FY 2010. The poor resource levels reflect a large unfunded retirement healthcare liability of $22.2 million, which depresses resources, as well as investment losses incurred in FY 2009 and large endowment draws. Wittenberg closed its retiree health care plan that will result in a $10 million reduction of the liability for FY 2011 and improvement in balance sheet resources.

*Aggressive investment asset allocation, with a high percentage of illiquid non-marketable alternatives for the overall size of the endowment (less than $100 million) and the University's operating needs.

*Period where governance and management oversight allowed decisions to be made resulting in endowment draws higher than the 5% industry standard, deep operating deficits, management turnover and an over-allocation of non-marketable illiquid investments to achieve a higher investment return.

*Continuing enrollment challenges expected, with enrollment targets expected to be accomplished through heavy tuition discounting. Although enrollment increased to 1,872 full-time equivalent (FTE) students for Fall 2010, the freshmen tuition discount rose to 56% for Fall 2010 (with revenues in the current FY 2011), up from 52% for the Fall 2009 entering class.

*Leveraged balance sheet with debt-to-revenues of 0.82 times at fiscal year-end 2010 (FYE 2010) and additional borrowing expected, as the University is utilizing bank lines to bridge finance renovation of a recently acquired building, coupled with a high average age of plant of over 20 years, indicating the likelihood of need for capital investments in the campus.

STRENGTHS

*Good operating liquidity, with $23.3 million of monthly liquidity as measured by Moody's, or 156 monthly days cash, or more than five months of annual operations.

*Consistent fundraising reflected in three-year average annual gift revenues of $6.3 million from FY 2008-FY 2010. We expect that fundraising will remain at levels seen in recent years, as the University is in the quiet phase of a capital campaign.

*New Board and management leadership and a coming presidential change with commitment to implement changes to restore the University to improved operating performance and cash flow generation, as well as attempt to improve student recruitment and grow net tuition revenue.

*University actions taken to address recruiting and operating challenges, reflected in a reduction of operating expenses in FY 2010 from the previous year, although it is uncertain that the reductions are sustainable.

DETAILED CREDIT DISCUSSION

LEGAL SECURITY: The bonds are a general obligation of the University. There are cash-funded debt service reserve funds for the Series 1999 and 2005 bonds of approximately $1,500,000 and $816,000, respectively, as of June 2010.

DEBT STRUCTURE: All of the University's debt is fixed rate and amortizing.

INTEREST RATE DERIVATIVES: None.

RECENT DEVELOPMENTS/UPDATE:

Wittenberg University continues to generate weak operating performance and cash flow, as calculated by Moody's, with an annual operating margin for FY 2010 of negative 6.9% and an operating cash flow of 2.9%. Although the loss is improved from the previous year when the University generated a negative 12.6% operating margin and 0.7% cash flow margin, Wittenberg currently expects FY 2011 to reflect only a small improvement in operations and continued weak cash flow. The University implemented cost reduction measures, including no salary increases, reflected in the 3.1% decrease in operating expenses ($1.6 million). However, it is uncertain how long the constrained expenses are sustainable without impacting the academic franchise, including class offerings and faculty. For FY 2011, operating cash flow was insufficient to fund debt service fully and the University used unrestricted funds of $1.1 million to fully meet its debt service requirements on a timely basis. We expect Wittenberg will need to do so for the upcoming FY 2012 until it can produce growth in tuition revenue to improve operating cash flow.

Endowment spending has been above the industry average of 5% but core spending has been reducing over the past three years, with the current budgeted spend rate of 5.9% on a three-year average despite its intention to try to reduce to a 5% level. However, the normal draw is exclusive of extraordinary spending from a $3 million draw from unrestricted endowment to fund strategic investments to try to grow enrollment through programs, recruiting and improved retention, with the amount nearly fully spent.

The single largest challenge to the University's turnaround in operations is the inability to significantly grow tuition revenues, the single largest contributor to operating revenues at 73% for FY 2010. Enrollment has been volatile but rose in Fall 2010 which will drive the current FY 2011 operating revenues. However, for FY 2010 enrollment for Fall 2009 declined to 1,792 FTEs from 1,854 FTEs the previous year. Additionally, net tuition per student declined to $16,147 for FY 2010 from $16,447 the prior year, driven by a rise in tuition discounting to recruit students.

Wittenberg, located in Springfield, Ohio, recruits students in a highly competitive higher education landscape, competing with Ohio private institutions as well as public universities. This is reflected in the relatively weak selectivity of 73% for Fall 2010 and a yield on accepted freshman of 22%. The University experienced a rise in freshman applications for the upcoming Fall 2011; however, it is expected to see either a stable or higher freshman discount of the 56% experienced for the Fall 2010 entering class. We expect Wittenberg to continue to experience fierce competition for students, resulting in the continued need to significantly discount tuition, with resulting weak growth, at best, of net tuition revenues. Integration of a successful marketing/branding campaign and campus-wide involvement and continuity also will be important factors to better position the University in a competitive market environment.

For FY 2010, the University reported an investment gain of 11.2% compared to a loss of 18.2% for the prior year. The asset allocation is aggressive for the size of the endowment of less than $100 million, with 27% to domestic and international public equity, 26% to private equity/venture capital, 20% to hedge funds, 15% to fixed income, 5% other alternatives, and 7% to real assets. The investment pool has some manager concentration with allocations of 12% and 11%, respectively to two comparatively illiquid hedge funds. Liquidity within the portfolio is good, with Wittenberg reporting monthly liquidity of $23 million for FY 2010 or a calculated 156 days. Wittenberg projects a comparable level for FY 2011 ending June 30, 2011.

At FYE 2010, Wittenberg reported a $22.2 million post-retirement benefit liability that is the primary driver for the negative unrestricted financial resources. The University closed its post-retirement healthcare plan to new employees in FY 2008. It also redesigned the plan and renegotiated the health care plans. As a result, for FY 2011 it expects to reduce the liability by nearly $10 million that will result in a reduction in the negative unrestricted financial resources and a possible return of expendable resources to positive. Nonetheless, we expect financial resources to remain weak due to poor operating performance and cash flow generation.

The University has launched a capital campaign, reporting $38 million raised to date in gifts and pledges during the current silent phase. The goal and timeline has not yet been finalized by the Board. Included in the campaign is the renovation of Blair Hall, a $5.4 million project to support the education program at the University. In addition, the University acquired a facility owned by the Springfield Museum of Art for $600,000. Wittenberg intends to operate programs for its notable fine arts program and renovated some space for a black box theater. We believe the University has substantial deferred maintenance, with an average age of plant of over 20 years as calculated by Moody's, amongst the oldest of rated private colleges and universities in our portfolio. We believe Wittenberg will be constrained to put capital investment into its campus, which Moody's considers critical to attract and retain students.

The Board has recently elected a new Board chair and vice-chair, who also serves as chair of the Finance Committee. The Board is committed to implement changes at the University to restore it to improved operating performance and financial health. The University's president has announced that he will leave the University in June 2012. A search process is underway.

Outlook

The negative outlook is short-term to await the FY 2011 financial results and outcome of Fall 2011 enrollment levels to assess the impact of stagnant to declining net tuition revenues on the University's already weak operating cash flow and debt service coverage, including the University's ability to make timely debt service payments.

WHAT COULD MAKE THE RATING GO UP

Not likely in the foreseeable future. Any upgrade would be driven by permanent reversal of operating deficits and improved operating cash flow generation, resulting in consistently better debt service coverage, coupled with improved liquidity and stable enrollment and tuition trends

WHAT COULD MAKE THE RATING GO DOWN

Failure to improve operating cash flow generation and debt service coverage; lack of improvement in student market position demonstrated by at least stable enrollment and growth in net tuition revenues and net tuition per student; additional borrowing

KEY INDICATORS (Fall 2010 enrollment data and FY 2010 financial results)

Enrollment: 1,872 full-time equivalents

Total Direct Debt: $44.8 million

Total Comprehensive Debt: $44.8 million

Net Tuition Per Student: $16,147

Total Tuition Discount: 49.4%

Unrestricted Financial Resources: -$18.2 million

Expendable Financial Resources: -$4.4 million

Expendable Resources to Direct Debt: -0.1 times

Expendable Resources to Operations: -0.1 times

Monthly Liquidity: $23.3 million

Monthly Days Cash (unrestricted funds available within 1 month divided by operating expenses excluding depreciation, divided by 365 days): 156 days

FY 2010 Annual Operating Margin: -6.9%

FY 2008-2010 Three Year Average Operating Margin: -9.6%

Operating Cash Flow Margin: 2.9%

Three Year Average Debt Service coverage: 0.4 times

Reliance on Student Charges: 73%

Reliance on Investment Income: 10%

Reliance on Gifts: 10%

RATED DEBT:

Series 2001, Series 2005: Ba1

Series 1999: Ba1; insured by Ambac

CONTACTS

University: Darrell B. Kitchen, Vice President for Business and Finance, 937-327-7009

PRINCIPAL RATING METHODOLOGY

The principal methodology used in this rating was Moody's Rating Approach for Private Colleges and Universities published in September 2002.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Diane F. Viacava
Analyst
Public Finance Group
Moody's Investors Service

Erin V. Ortiz
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA

MOODY'S DOWNGRADES WITTENBERG UNIVERSITY'S (OH) RATING TO Ba1 FROM Baa2; OUTLOOK IS NEGATIVE
No Related Data.
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