|[September 03, 2014]
Fitch Rates Savannah College of Art and Design Revs 'BBB'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings has assigned a 'BBB' rating to approximately $193 million
of Private Colleges and University Authority series 2014 bonds issued on
behalf of Savannah College of Art and Design (SCAD).
The bonds are expected to be sold via negotiation on or about the week
of Sept. 16, 2014. Proceeds will be used to fund several capital
projects, refinance certain outstanding debt, terminate an outstanding
swap, and pay associated costs of issuance.
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
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
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 Southern Association of Colleges and Schools Commission on
Colleges (SACS-COC) to award bachelors and masters degrees. The
university's accreditation with SACS-COC was most recently re-affirmed
for a 10-year term in 2010.
In addition to its campus in Savannah, Georgia, SCAD established an
Atlanta campus in March 2005 and subsequently integrated the operations
of the Atlanta College of Art in June 2006. It established a Hong Kong
campus in 2010, which operates under a 10-year operating lease. The
college also offers a residential study-abroad location in Lacoste,
France and maintains an eLearning enterprise, which augments course
offerings for on-campus students and provides fully online degree
programs for distance learners. All of the campuses are accredited by
SACS-COC, with the Hong Kong campus additionally accredited from the
Hong Kong Council for Accreditation for Academic and Vocational
TRACK-RECORD OF POSITIVE FINANCIAL PERFORMANCE
SCAD has generated a positive GAAP-baed 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
Hong Kong campus realizing its first year of at least break-even
operations in fiscal 2014.
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 $93.5
million as of June 30, 2013.
Available funds as of June 30, 2013 covered fiscal 2013 operating
expenses and pro forma long-term debt ratios by 37% and 40.8%,
respectively. Both ratios are comparable with Fitch's 2013 medians for
'BBB' category private colleges and university medians of 51.8% and 51%,
respectively. Based on unaudited fiscal 2014 financial statements, the
college produced another sizeable operating surplus in fiscal 2014,
which will bring SCAD's balance sheet ratios more in line with the
mid-range in the 'BBB' rating category.
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
$83 million, or slightly ahead of the fiscal year-end 2013 balance of
$80.7 million. Management's multi-year financial projections, which rely
on conservative budgetary assumptions, envision the resumption of
balance sheet growth beginning in fiscal 2016. Given management's
track-record of generating robust operating cash flows coupled with the
conservative assumptions underpinning the forecast, Fitch believes
management's plan is attainable.
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
Enrollment growth has been aided by the opening of new campuses in
Atlanta and Hong Kong. The Atlanta campus has grown from 257 students in
fall 2005 to 2,003 students in fall 2013 and represented 17.2% of total
headcount enrollment. The Hong Kong campus has been on a similar track,
from initial class of 141 students in fall 2010 to 510 students in fall
2013, or 4.4% of total headcount enrollment. There are no plans to open
any additional campuses at present time.
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 June
30, 2014, excluding the balance on outstanding non-cancellable operating
leases. The proposed transaction will also eliminate renewal risk with
an associated liquidity facility supporting the Series 2004 variable
rate demand bonds. Management also expects to utilize bond proceeds to
terminate an outstanding swap that was used to manage interest rate
exposure associated with the series 2004 bonds. The fair market value of
the swap as of June 30, 2014 was a negative $9.8 million.
Based on a preliminary debt schedule, annual debt service on the
proposed transaction is expected to be level at around $11.7 million
through maturity. Two significant non-cancellable operating leases will
remain outstanding once the current capital plan is complete, which will
elevate the college's annual debt carrying charges; however, current
annual debt service is still expected to register below the 9.6%
recorded in fiscal 2013. The college's pro forma maximum annual debt
service (MADS), which incorporates the potential bullet payment in
fiscal 2018 associated with an outstanding new market tax credit note,
represented a high 8.6% of fiscal 2013 operating revenues; however,
Fitch notes positively that the balance was covered by a solid 3.7x from
fiscal 2013 net operating income.
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, this action was additionally
informed by information from the underwriter.
Applicable Criteria and Related Research:
-- 'U.S. College and University Rating Criteria' (May 12, 2014);
-- '2013 Median Ratios for U.S. Private Colleges and Universities (July
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
2013 Median Ratios for U.S. Private Colleges and Universities
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
[ InfoTech Spotlight's Homepage ]