[January 28, 2015]

Fitch Rates Wartburg College, IA's Revs Series 2015 'BB'; Outlook Negative

Fitch Ratings has assigned a 'BB' rating to approximately $84.6 million private college revenue refunding bonds, series 2015 issued by the Iowa Higher Education Loan Authority on behalf of Wartburg College (Wartburg or the college).

The fixed rate series 2015 bonds are expected to sell via negotiation the week of March 2, 2015. Proceeds of the bonds will be used to currently refund all of the outstanding series 2005A and 2005B bonds, and to pay costs of issuance.

At the same time, Fitch affirms the 'BB' rating on the outstanding series 2005A bonds.

The Rating Outlook is revised to Negative from Stable.

SECURITY

The series 2015 private college facility revenue bonds are a general obligation of the college, secured by a lien on revenues of the college and a mortgage on the core campus, including the wellness center which was the prime security for the series 2005B bonds. Additionally, the bonds are supported by a cash-funded debt service reserve fund equal to maximum annual debt service (MADS).

KEY RATING DRIVERS

NEGATIVE OUTLOOK: The revised Outlook reflects the financial stress created by a limited ability to raise revenue, coupled with weakening operations driving lower MADS coverage. The negative trending enrollment and higher discounting rate is concerning and further supports a Negative Outlook.

'BB' RATING AFFIRMED: Wartburg's 'BB' rating reflects its small headcount and high reliance on student revenue for operations, together with a history of generally negative and volatile operating margins, as calculated by Fitch. Though weak, there is relative stability in the financial cushion, and the lack of additional debt plans alleviates some concern over the high debt burden.

FINANCIAL FLEXIBILITY LIMITED: Wartburg is dependent on student fees to support operations. This reliance is exacerbated by an increasing discount rate which limits growth in net tuition revenues.

DECLINING ENROLLMENT TREND: Wartburg has experienced three consecutive years of declining full-time equivalent (FTE) enrollment. Competition continues to challenge the college and drive up the institutional aid requirement, which is already high.

RATING SENSITIVITIES

OPERATING PERFORMANCE: The rating is sensitive to modest shifts in enrollment and resultant impacts to operating performance. Failure to steadily improve operating performance could negatively pressure the rating.

RESOURCE STABILITY: Wartburg's inability to sustain and build on vastly improved resources could negatively pressure the rating.

CREDIT PROFILE

Wartburg College, established in 1852 as a liberal arts college of the Evangelical Lutheran church, is located in Waverly, IA and serves predominantly in-state undergraduate students.

OPERATIONS WEAKENING

Wartburg's operating results have been historically negative on a GAAP accrual basis, though they posted a slight surplus in 2013 and have met current debt service coverage. Fiscal 2014 again saw a decline, generating an operating margin, including its endowment draw, of negative 3.6%, on a full accrual basis.

These weaker 2014 results were largely driven by increased expenses and higher tuition discounting. They did not meet Fitch's expectations that the college would sustain and build on vastly improved margins over the past five years (from fiscal 2009) and stabilize headcount. According to management, fiscal 2014 operations were negatively impacted by lower than expected net tuition and fees (due to increased financial aid expense), coupled with new development staff, utilities, bookstore inventory, health insurance and salary increases.

Management budget projections for fiscal 2015 remain negative, though slightly stronger than fiscal 2014 results. Favorably, management revises its budget in October with actual enrollment counts. However, a small increase in net tuition revenue and gifts is expected to be offset by lower auxiliary revenues, increased salary and benefits costs, and a marketing campaign.

The college is in the process of identifying both new revenues and expense reductions for fiscal 2016, mostly staff and faculty reductions. Management expects to see operating stability by fiscal 2016. Fitch will monitor to see if more positive results are achievable. Additional concern comes from a tuition rate increase for fall 2015 (fscal 2016) that is expected to be significantly lower than historical levels, the number of high school graduates in Wartburg's region which continues to be pressured, and the college's negative enrollment trends.

Wartburg's ability to achieve operating balance and enrollment stability in the coming fiscal cycles will be a key factor in Fitch's rating determination.

HIGH RELIANCE ON (News - Alert) TUITION

Negative-trending enrollment continued for the third consecutive year in fall of 2014 and continues to pressure operations. Given its small operating budget, the college's operations are vulnerable to slight variations in enrollment and financial aid without diligent expense management.

Wartburg relies heavily on student revenues, increasing to 82.6% in fiscal 2014. Growth in gross tuition and fees (3.3%) over prior year, as anticipated, is due to tuition and fee increases. Wartburg projects modest incremental growth in net tuition revenue in fiscal 2015 which is supported by a tuition rate increase for fiscal 2015 of 5.3%, which is lower than historical levels, and no expected increase in the discount rate. However, the tuition rate increase in fiscal 2016 (fall 2015) is expected to be well below prior years (2.9%), which could have a negative impact on net tuition revenues, without enrollment and discounting stability.

Growth in net tuition revenue in fiscal 2014 was flat due to increased financial aid (the discount was 51.5%). The college projects very modest net tuition revenue growth in fiscal 2015.

Fitch will continue to monitor the college's ability to grow net tuition revenue, stabilize enrollment and effectively manage the institutional aid expense. The inability to do so could negatively impact the rating.

NEGATIVE-TRENDING ENROLLMENT

Headcount declined by 3.1% in fall 2014 to 1,661. FTE enrollment was also down at 1,628, from 1,680 FTE in fall 2013. Wartburg's fall 2014 enrollment fell short of projected targets. Fitch notes that given the school's modest enrollment, a decline of 3% or more could have a large financial impact. Management projects stable enrollment for fall 2015, with a stretch goal of 520 new students, but uses more conservative budget assumptions. The college's fall 2014 admissions are not highly selective, but are consistent with prior years. New-student selectivity was slightly weaker at 77.4% versus 74.6% the prior year. The matriculation rate of 27% also indicates significant demand pressure. Retention fluctuates year-to-year. The freshman-to-sophomore retention rate weakened in fall 2014 to 74% from the prior year 81%. Fitch notes that Wartburg's principally regional market area has declining numbers of high school graduates.

Fitch views the continuing decline in enrollment as a credit concern, particularly after expectations for incremental growth and stabilized enrollment. Inability to stabilize enrollment is a factor in the Negative Outlook.

LIQUIDITY SUPPORTS RATING AFFIRMATION

Balance sheet resources grew in fiscal 2014 as a result of investment returns and gifts and contributions. Cash and investments totaled $75.6 million in fiscal 2014, up from about $71.7 million in the prior year. Consequently, available funds, defined as unrestricted cash and investments, increased slightly to $33.1 million in fiscal 2014 from $31.8 million in fiscal 2013. Wartburg's available funds ratios remain strong for the rating category and indicate some cushion for operations. Available funds are 61.4% of fiscal 2014 operating expenditures and 37.2% of long-term debt.

Under the bond documents, the college's liquidity covenant requires it to maintain long term debt-to-total cash and investments, including restricted cash, of greater than .50x; based on information provided the fiscal 2014 liquidity ratio calculation improved to 97.7%, exceeding the 50% minimum requirement.

The alternative investment allocation for Wartburg is approximately 21%, essentially the same as the previous year. Management reported that the endowment returned 11% in fiscal 2014, increasing the pooled endowment market value as of May 31, 2014 to $59.1 million, compared to $52.4 million over the prior year. Wartburg continues to draw 4.5% of the endowment based on a rolling 36-month average

Wartburg's high reliance on student-related revenue necessitates maintenance of a liquidity cushion at or above current levels to manage operating and enrollment fluctuations. Positively, as of December 2014, the college has raised $60 million of gifts and pledges of its $75 million campaign goal after entering a public phase in October 2014. Fitch will continue to monitor the college's fundraising progress.

HIGH DEBT BURDEN; DECLINING COVERAGE

Post refunding, Wartburg's long-term debt of $84.6 million yields a high MADS burden of 11.9%. Historically, Fitch believes the college has partially offset this debt burden by covering current debt service from operations. However, MADS ($6.2 million) coverage declined to 1.06x based on fiscal 2014 unrestricted operating revenues, as calculated by Fitch.

The series 2015 debt structure has a slightly ascending structure with MADS occurring in fiscal 2035. Average annual debt service (AADS) coverage based on fiscal 2014 operations is stronger at 1.13x. The college's debt burden is expected to decline over time due to normal amortization and the lack of any new debt plans. The college continues to be in compliance with its legal rate covenant which requires 1.10x coverage, unless its liquidity ratio exceeds .75x.

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

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria' (May 12, 2014);

--'Fitch Affirms Wartburg College, IA's Revs at 'BB'; Outlook Stable' (March 19, 2014).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978775

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