HESTER OUNTY (PA) HEALTH AND EDUATION FA ILITIES …

CHESTER COUNTY (PA) HEALTH AND EDUCATION FACILITIES AUTHORITY (ISSUER) IMMACULATA UNIVERSITY (BORROWER) PRIVATE HIGHER EDUCATION, US

RESEARCH | 23 OCTOBER 2017

IMMACULATA UNIVERSITY FACES ENROLLMENT WOES

Negotiated sale, pricing 24 October Revenue Bonds (Immaculata University Project) Series 2017 ? USD 37.72m

CREDIT TREND

Significant enrollment declines at Immaculata University (the university) led to recurring operating losses. New leadership is implementing various enrollment initiatives, which are likely to restrain revenue growth and hurt student demand in the long run. The current offering will help the university to reduce interest risk exposure, but leave it highly levered.

INTRODUCTION

The university, located 20 miles west of Philadelphia, is a private Catholic institution founded by the Sisters, Servants of the Immaculate Heart of Mary (IHM), and provides liberal arts and professional education to traditional and adult students. IHM owns the land and buildings comprising Immaculata's campus, except for some athletic facilities, a stadium, a library and an office building, which are owned by the university.

While Immaculata recently transformed to lay leadership, welcoming its first president who is neither a Catholic sister nor a priest, IHM still takes an active involvement and maintains reserved powers regarding the university's operations, including final approval over certain matters voted on by the board of trustees. Four out of the seven senior leadership positions were newly appointed this year (see table below).

President

Vice president for finance and administration Vice president for enrollment management Vice president for academic affairs Vice president for student development and engagement Vice president for university advancement, marketing and communications

Vice president for mission and ministry

Senior Management Team

Barbara Lettiere

Janet M. Garrity

Gerald Wargo Angela Tekely

Lettiere began her term on 1 July 2017, after serving as chair of Immaculata's board of trustees for the past seven years. The previous president, Sister Patricia Fadden, stepped down in June 2017 after 15 years of service.

Garrity began her term on 1 May 2017, after serving as a member of the board of trustees for the past three years.

Wargo joined on 1 September 2015, after serving DeVry University as president since academic year 2012-2013.

Tekely is the interim vice president for academic affairs.

Patricia Canterino

Canterino received a promotion to vice president on 1 June 2017, after serving Immaculata in the athletics department for the prior 17 years.

Regina Donovan

Sister Mary Henrich, IHM

Donovan joined on 19 September 2017, after most recently serving as president and board chair for the Association of Fundraising Professionals, Greater Philadelphia Chapter.

Henrich was a former assistant professor of theology at Immaculata, and received a promotion to vice president on 1 July 2016.

The university reported operating deficits in both FY15 and FY16, following years of enrollment losses. The new leadership continues to face enrollment pressures as universities in Pennsylvania compete for fewer high school graduates, despite various enrollment initiatives.

The current offering will refund past issues, including certain variable-rate debt, to achieve cost savings and reduce interest risk exposure. The bonds are general obligations of the university, secured by a revenue pledge consisting of all receipts and revenues generated from the operation of the university. Assets of IHM, including Immaculata's campus, will not be subject to any lien as security for payment of the bonds.

Enrollment and admissions

Immaculata primarily draws students from within the state (66%), and approximately 77% of its student population is Catholic. During the past five years, total headcount enrollment dropped 37% while its full-time equivalent (FTE) enrollment fell 19% (Table I). This negative trend reflects the declining enrollment at Catholic high schools statewide, particularly in the Philadelphia region.

It appears past enrollment initiatives, including outreach events with local high schools, new academic programs, various capital investments, higher tuition discounts (27% in FY16 compared to 22% in FY12), and a 5% reduction in room and board fees in fall 2016 did not have any material impact on student demand. A higher acceptance rate largely contributed to the mild rebound in the incoming class size during fall 2016 (Table I). Meanwhile, based on SAT scores, student quality has remained stable.

Under its new leadership, the university implemented a 24% tuition cut for undergraduates, and made SAT and ACT scores optional for admissions during fall 2017. However, there has yet to be a reversal in the declining enrollment trend, as the university reported 885 undergraduates enrolled in fall 2017, compared to 900 during the prior year. In addition, dropping the standard test requirement is likely to have a negative impact on the university's reputation, and thus in turn hurt student demand in the long run.

Competition

Table II shows Immaculata's competitors, primarily consisting of other private Roman Catholic universities in Pennsylvania. The university is the third Catholic school within the state to reset its tuition rate, following Rosemont College, which cut its tuition by 43% in 2015, and LaSalle University, which cut its tuition by 29% in fall 2017. Immaculata is more affordable compared to most of the schools in this group, and its admission statistics are softer.

Use of proceeds

The proceeds of the Series 2017 bonds, together with other available funds, will refund all past issues and fund a debt service reserve.

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CHESTER COUNTY (PA) HEALTH AND EDUCATION FACILITIES AUTHORITY (ISSUER) IMMACULATA UNIVERSITY (BORROWER) PRIVATE HIGHER EDUCATION, US

RESEARCH | 23 OCTOBER 2017

IMMACULATA UNIVERSITY FACES ENROLLMENT WOES

Financial operations

Net tuition revenues, which account for about 71% of the university's operating revenues, dropped by 21% during the period of FY12-FY16 (Table III), echoing a 19% decline in FTE enrollment during that time (Table I). The tuition reset in fall 2017 might restrain Immaculata's ability to generate revenues, unless there is a substantial improvement in enrollment.

To better align costs with shrinking revenues, the university relied on layoffs and eliminated vacant positions, which led to a 19% decline in FTE faculty during the past five years. Total operating expenses declined by 8% as a result. However, as total operating revenues fell at a faster pace, the university recorded an operating deficit of USD 2.6m in FY15, followed by another deficit of USD 892,275 in FY16. Unaudited financials for FY17 show a larger deficit of USD 4m.

Debt profile

The Series 2017 bonds will be the university's only bonds outstanding upon issuance. In addition, the school has various notes payable and capital lease agreements of USD 4.48m. This amount includes about USD 3.262m in an outstanding line of credit loan from IHM. The maximum that can be drawn on the line, which is available for working capital, is USD 10m. The line is an unsecured general obligation of the university, and subordinate to payment of the Series 2017 bonds.

The university is in a highly leveraged position. Its total debt outstanding of USD 42.2m (including bonds and notes) is equal to 1.07 times net assets of USD 39.61m and 2.5 times endowment of USD 16.91m.

Security features Pledged revenues consist of all receipts and revenues generated from

the operation of the university, but excludes restricted donations and restricted income. A debt service coverage ratio of 1.1x for FY18 and FY19, and of 1.2x starting in FY20. A debt service reserve fund.

on 30 June and 31 December of each year beginning 30 June 2018. Additional bonds test: (1) pro forma annual debt service coverage of

1.25x, based on the two most recent fiscal years; or (2) for refunding bonds, pro forma maximum annual debt service (MADS) is not to exceed 110% of MADS prior to the refunding. No mortgage lien.

Rating summary Fitch has assigned a BB rating and a stable outlook to the bonds.

Continuing disclosure The university has hired the Bank of New York Mellon Trust Company NA as its dissemination agent, and will disclose annual financial information and operating data within 150 days following each fiscal year ended 30 June. During the past five years, the university had various disclosure violations, including deficient and late filings of its annual report.

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CHESTER COUNTY (PA) HEALTH AND EDUCATION FACILITIES AUTHORITY (ISSUER) IMMACULATA UNIVERSITY (BORROWER) PRIVATE HIGHER EDUCATION, US

RESEARCH | 23 OCTOBER 2017

IMMACULATA UNIVERSITY FACES ENROLLMENT WOES

Enrollment

TABLE I: Enrollment and Admissions

Fall 2012

Fall 2013

Fall 2014

Fall 2015

Undergraduate Headcount 1,155

1,137

1,032

977

Graduate Headcount 1,234

1,104

1,161

1,173

Non-Traditional Headcount* 1,728

1,407

1,038

766

Total Headcount Enrollment Total FTE Enrollment

4,117 2,279

3,648 2,023

3,299 2,301

2,966 2,037

Freshman Admissions

Applied Accepted

1,650 1,314

1,772 1,451

1,729 1,310

1,586 1,250

Acceptance Rate

79.6%

81.9%

75.8%

78.8%

Enrolled Matriculation Rate

243 18.5%

286 19.7%

219 16.7%

191 12.0%

Standard Test Score

SAT Math SAT Verbal SAT Writing

474

475

483

483

476

477

492

487

480

472

493

484

Source: Preliminary official statement * Adult undergraduate students

Fall 2016 900 1,055 604 2,610 1,835

Five-yr % change -22% -15% -65% -37% -19%

1,584 1,304 82.3% 217 16.6%

-4% -1%

-11%

485

2%

495

4%

496

3%

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CHESTER COUNTY (PA) HEALTH AND EDUCATION FACILITIES AUTHORITY (ISSUER) IMMACULATA UNIVERSITY (BORROWER) PRIVATE HIGHER EDUCATION, US

RESEARCH | 23 OCTOBER 2017

IMMACULATA UNIVERSITY FACES ENROLLMENT WOES

Private Institutions

Location

TABLE II: Competition Tuition 2017-18 Acceptance Matriculation Retention Graduation Enrollment Five-yr % change

Immaculata University Immaculata

$26,500

82%

17%

83%

67%

2,160

-45%

St. Joseph's University Philadelphia

$43,700

78%

18%

90%

80%

7,345

9%

LaSalle University

Philadelphia

$28,800

77%

Chestnut Hill College

Philadelphia

$34,950

64%

Holy Family University Philadelphia

$29,338

68%

Villanova University

Villanova

$50,554

44%

DeSales University

Center Valley

$34,500

76%

20%

78%

65%

5,310

21%

66%

48%

1,698

33%

77%

60%

2,109

22%

96%

90%

10,209

23%

78%

68%

2,942

-5% -13% -12% 1% 3%

Gwynedd Mercy

Gwynedd Valley

$32,820

91%

27%

80%

51%

2,415

6%

Alvernia University

Reading

$32,840

74%

Marywood University

Scranton

$32,190

68%

Cabrini University

Radnor

$30,400

71%

Neumann University

Aston

$28,710

94%

Rosemont College

Rosemont

$18,500

69%

26%

76%

53%

2,495

21%

83%

66%

2,888

21%

76%

60%

1,849

27%

70%

54%

2,678

16%

65%

48%

747

-4% -10% -32% -9% 1%

Source: Preliminary official statement; National Center for Education Statistics, fall 2016 data. Note: Enrollment based on 12-month unduplicated FTE enrollment.

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CHESTER COUNTY (PA) HEALTH AND EDUCATION FACILITIES AUTHORITY (ISSUER) IMMACULATA UNIVERSITY (BORROWER) PRIVATE HIGHER EDUCATION, US

RESEARCH | 23 OCTOBER 2017

IMMACULATA UNIVERSITY FACES ENROLLMENT WOES

Fiscal years ended 30 June, in USD Net tuition revenues Auxiliary revenues Other revenues Total operating revenues Total operating expenses Operating surplus (deficit) Non-operating activities Changes in Unrestricted Net Assets Changes in temporarily restricted net assets Changes in permanently restricted net assets Net assets at beginning of year* Net assets at end of year

2012

TABLE III: Financial Summary

2013

2014

44,136,029

43,036,648

42,129,389

5,912,114

6,226,640

6,912,749

5,025,330 55,073,473

4,973,488 54,236,776

4,971,168 54,013,306

54,254,514

54,039,445

53,993,641

818,959 874,926

197,331 692,181

19,665 175,912

1,693,885 (1,381,381)

338,698

889,512 856,279 350,185

195,577 1,336,468 158,817

37,270,525

37,921,727

37,842,520

37,921,727

40,017,703

39,533,382

2015 38,333,585 6,464,509 5,012,996 49,811,090 52,446,085 (2,634,995) (426,318) (3,061,313)

58,835 219,559 38,007,565 35,224,646

2016 35,082,820 6,031,999 8,005,052 49,119,871 50,012,146 (892,275) (870,323) (1,762,598) 4,871,537 1,276,417 35,224,646 39,610,002

Five-yr % change -21% 2% 59% -11% -8%

4%

Statement of Financial Positions, in USD Cash and cash equivalents Investments Notes payable Bonds payable

2,251,668 19,229,884 8,267,019 35,705,818

1,443,859 20,811,694 8,055,953 34,816,814

2,731,306 22,564,005 7,901,662 40,260,442

8,060,275 17,517,128 7,962,145 39,831,891

6,053,164 17,012,809 4,483,821 39,380,384

169% -12% -46% 10%

Endowment Funds, in USD Unrestricted Temporarily restricted Permanently restricted Total

5,486,168

5,933,682

6,304,834

6,096,710

5,543,927

1%

1,873,083

2,723,415

3,922,086

3,925,812

3,168,492

69%

6,786,328

7,136,513

7,203,541

7,423,100

8,199,242

21%

14,145,579

15,793,610

17,430,461

17,445,622

16,911,661

20%

Debt Service Coverage Ratio Income available for debt service Debt service requirement Coverage ratio

6,981,754 3,208,544

2.18x

6,096,787 3,454,981

1.76x

Source: Preliminary official statement; annual audits, FY12-FY16; EMMA filings * Reflecting restatement of beginning balance in FY14 and FY15.

5,757,717 2,757,403

2.09x

3,937,916 2,749,613

1.43x

5,303,449 2,407,509

2.20x

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