The bonds are expected to be sold via negotiation on or about the week of
The Rating Outlook is Stable.
The bonds are a general unsecured obligation of the college. There is not expected to be a debt service reserve fund to support the series 2014 bonds.
KEY RATING DRIVERS
'BBB' Rating Assigned: The 'BBB' rating reflects SCAD's healthy financial profile, with a track-record of positive margins and improving balance sheet, and sound market position as one of the largest non-profit art and design schools in the U.S. with good demand indicators and a growing enrollment base. Offsetting factors include a strong reliance on student revenues, a high debt burden, and limited fundraising history.
Positive Financial Performance: SCAD generated a positive GAAP-based operating margin in each of the past five fiscal years, driven by favorable enrollment trends, periodic increases in student charges, well-managed tuition discounting, and prudent expense management. SCAD benefits from a non-tenured faculty structure and the absence of collective bargaining units, which provides flexibility to respond to changes in student demand or staffing needs.
Markedly Improved Balance Sheet: SCAD's balance sheet has improved significantly in recent years, driven primarily by the retention of operating cash flow. Management intends to expend a portion of reserves toward the current capital plan and repayment of debt in fiscal 2015, which has been incorporated into the rating. Multi-year financial projects envision the resumption of balance sheet growth in fiscal 2016.
Growing Enrollment Base: Headcount enrollment has grown in recent years, aided by the opening of new campuses, enhanced recruiting efforts, and strategic programmatic offerings that are aligned with student demand and market-relevant education. SCAD's relatively large enrollment size for the 'BBB' rating category minimizes the impact on modest enrollment shifts on the operating budget and is advantageous to achieving greater levels of operational efficiency.
Manageable Leverage Position: The proposed issuance is expected to be fully offset by an increase in resources available for its repayment and is expected to achieve cost savings through the termination of some uneconomical operating leases. Further, it will significantly reduce SCAD's exposure to variable rate debt and eliminate renewal risk with an associated liquidity facility. There are no near-term debt plans.
Persistent, Unmanaged Enrollment Volatility: Persistent, unmanaged enrollment volatility would negatively pressure financial performance given the college's significant reliance on student-generated revenue.
Improved Leverage and Liquidity Metrics: A moderating debt burden coupled with positive operating performance leading to continued improvement in available funds may support upward rating movement
Founded in 1978, SCAD is a private, not-for-profit university accredited by the
In addition to its campus in
TRACK-RECORD OF POSITIVE FINANCIAL PERFORMANCE
SCAD has generated a positive GAAP-based margin in each of the past five fiscal years, averaging a solid 8.2% between fiscal 2009 and 2013, and is on track to register another healthy operating margin in fiscal 2014 based on Fitch's review of unaudited financial statements. Total operating revenues increased at an average annual growth (AAGR) rate of 7% between fiscal 2009 and 2013, driven by favorable enrollment trends, periodic increases in student charges and well-managed tuition discounting. At the same time, SCAD registered an AAGR of 4.6% in total operating expenses. Cost restraint was realized through various initiatives, including the maintenance of unfilled positions and elimination of faculty sabbaticals. Management reported that all of SCAD's individual campuses are financially self-supporting, with the
MARKEDLY IMPROVED FINANCIAL CUSHION
SCAD's balance sheet has improved significantly in recent years, driven by the retention of operating cash flow and, to a lesser extent, positive investment returns. Available funds, defined by Fitch as cash and investments less permanently restricted net assets, grew by a sizeable 708.1% between fiscal 2009 and 2013, to approximately
Available funds as of
Importantly, management plans to expend some of the college's financial reserves to finance a portion of the current financial plan and repay outstanding debt. Based on fiscal 2015 projections, cash and cash equivalents is expected to decrease from fiscal 2014 levels to around
GROWING ENROLLMENT BASE
Fitch views SCAD's ability to attract and retain students as a critical factor in the rating process since the majority of funding is from student-generated revenues. Total headcount enrollment stood at 11,618 in fall 2013, up 1.6% from the prior year and 17.3% ahead of headcount enrollment in fall 2009. Preliminary admissions statistics for fall 2014 appear positive and suggest that the college is on track to register incremental growth.
Enrollment growth has been aided by the opening of new campuses in
MANAGEABLE LEVERAGE POSITION
The proposed fixed-rate series 2014 issuance is expected to significantly reduce the college's historically high variable rate exposure, which stood at approximately 91% of long-term debt as of
Based on a preliminary debt schedule, annual debt service on the proposed transaction is expected to be level at around
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
-- 'U.S. College and University Rating Criteria' (
-- '2013 Median Ratios for U.S. Private Colleges and Universities (
2013 Median Ratios for U.S. Private Colleges and Universities
Source: Fitch Ratings
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