Funding pressure amid a heavy reliance on tuition revenues drove a downgrade for Philadelphia-based La Salle University.
Fitch Ratings lowered $124.4 million of outstanding La Salle University revenue bonds by to BBB-minus from BBB Monday, citing the Catholic school’s funding struggles. Fitch's outlook remains negative, leaving the university on the lowest rung of investment grade.
“Absent expected improvements in enrollment and operating performance, La Salle remains susceptible to deterioration in available funds over the intermediate term,” Fitch analyst Emily Wadhwani wrote. “The negative outlook reflects Fitch's concern that absent enrollment stabilization, cash flow will decline going forward to levels insufficient to offset a somewhat high age of plant, given La Salle's limited flexibility in available funds relative to its adjusted debt.”
La Salle’s outstanding revenue bonds include $40.1 million issued in 2017 and $84.3 million sold in 2012 through the Philadelphia Industrial Development Authority. The college’s debt profile is predominately fixed rate with $131 million in fixed rate revenue bonds and another $6.7 million in variable rate loans payable in 2019, according to Fitch. Debt service requirements on the fixed rate bonds are level at near $9 million and no additional debt is expected in the near term.
Wadhwani said La Salle’s decision to slash tuition by 29% in 2017 to the same rate families paid in 2008 gives the school some pricing power.
Enrollment has underperformed since the tuition reset, leading the school to use a supplemental endowment draw to support operations, which Wadhwani said is not sustainable for the long term. La Salle has seen an improvement in student quality and application levels of late providing some evidence that demand may recover to support incremental enrollment growth, according to Wadhwani.
La Salle’s student base is predominately undergraduate with total headcount at 4,933 for the fall 2019 semester. The college, which was founded in 1863 by the Institute of the Brothers of the Christian Schools, is on a 133-acre campus 10 miles north of Center City Philadelphia. It opened an additional campus in Plymouth Meeting, Pennsylvania, in 2008.
Wadhwani said La Salle is planning to refocus its strategy and leadership on enrollment management efforts after a weaker-than-expected matriculation rate from a steady year of applications in 2019. She also noted that deliberate decisions to scale back certain underused graduate programs contributed to a pressured total headcount over the past several years.
“Our strategic and financial plans are focused on strengthening resource allocation, capitalizing on areas of opportunity and improving operational efficiency," La Salle spokesman Chris Vito said in a statement. "We have refocused our enrollment management strategy and leadership and are pursuing areas of opportunity to support enrollment. Already, we are seeing strong indicators of improved performance in the coming year.”
Fitch calculated that La Salle's effective full endowment spend has averaged over 8% in each of the past three years, which is above its 5% allowable payout policy. Wadhwani noted that La Salle’s leadership is committed to reducing the university’s reliance on supplemental endowment support and its endowment has remained “largely resilient” during the past three years.
For the 2019 fiscal year, La Salle maintained roughly $80 million in available funds equating to approximately 55% of $145 million in long-term debt and capitalized operating leases, according to Fitch. The school’s available fund levels were steady to incrementally improve over the prior four years despite elevated support provided by the endowment.
