Cash flow struggles hurt a small college's bond rating

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Cash flow struggles led Fitch Ratings to downgrade a small suburban Philadelphia Catholic college deeper into junk territory.

Fitch cut Immaculata University to BB-minus from BB Wednesday, citing rising leverage amid declining enrollment.

The downgrade applies to $38.4 million of outstanding debt the roughly 1,700-enrollment Malvern, Pennsylvania-based school issued through the Chester County Health and Educational Facilities Authority.

Immaculata University in Malvern, Pennsylvania, experienced an 18% enrollment drop between 2016 and 2019.

Immaculata’s full-time student enrollment declined by 18% between fiscal years 2016 and 2019 before improving by about 3% last fall, which Fitch credit analyst George Strimola said indicates potential for improvement in future years.

Strimola said the school was downgraded because of continued deterioration in cash flow and available funds to debt ratio during the 2019 fiscal year coupled with having high capital needs despite facility investments in recent years.

“Immaculata's underlying market remains fairly weak, driven by a trend of flat to declining high school graduates within the state and significant competition for students from neighboring New Jersey,” Strimola wrote. “Immaculata has demonstrated some capacity to scale expenses with historical revenue declines, but these efforts have resulted in a thin cash flow and generally limited capacity for operating cost flexibility in future years.”

Revenue sources at Immaculata are limited with student-generated revenues constituting around 90% of university operations, according to Fitch. The college’s endowment spending practices are “sustainable,” but also provide limited support for operations, Strimola said.

Efforts by Immaculata to boost retention rates have paid dividends with freshman to sophomore year retention increasing to over 85% in 2019 compared to 75% the prior year, according to Strimola. The college is also expanding non-traditional programs and focusing on certification for high-demand health science and nursing professions, which Strimola said may support future growth efforts.

“While we are understandably disappointed in the Fitch ratings action, we are pleased that all the actions we have taken to improve our financial position were acknowledged by Fitch and resulted in their Stable outlook for Immaculata University,” Barbara Lettiere, president of Immaculata, said in a statement. “We are committed to achieving the results necessary for a ratings upgrade.”

A fundraising initiative planned for 2020 is aimed at providing Immaculata with the final elements of its capital plan that university officials consider “necessary” for sustaining enrollment growth in key enrollment areas, according to Strimola. The school’s near-term needs include replacement of a turf field and a new science laboratory facility. Despite a fundraising initiative for the science building already equaling nearly half of the estimated $6.5 million construction cost, Fitch is projecting increased deferred maintenance needs due to limited excess cash flow.

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