RATING ACTION IMPACTS $39 MILLION OF RATED DEBT OUTSTANDING
Ohio Higher Educational Facility Commission
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.
*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
*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
*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.
*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
*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
*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.
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
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
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
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.
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%
Series 2001, Series 2005: Ba1
Series 1999: Ba1; insured by Ambac
University: Darrell B. Kitchen, Vice President for Business and Finance,
PRINCIPAL RATING METHODOLOGY
The principal methodology used in this rating was Moody's Rating Approach for
Private Colleges and Universities published in September 2002.
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.
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Diane F. Viacava
Public Finance Group
Moody's Investors Service
Erin V. Ortiz
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S DOWNGRADES WITTENBERG UNIVERSITY'S (OH) RATING TO Ba1 FROM Baa2; OUTLOOK IS NEGATIVE
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