[November 14, 2014]

Fitch Rates Metropolitan College of New York Revs 'BB'; Outlook Stable

Fitch Ratings has assigned a 'BB' rating to approximately $68 million of revenue bonds, series 2014, issued by Build NYC Resource Corporation on behalf of the Metropolitan College of New York (MCNY).

The bonds are expected to be sold via negotiation on or about the week of Dec. 1, 2014. Proceeds will be used to finance the acquisition and renovation of space in a building at 40 Rector Street, fund capitalized interest, and pay costs of issuance. College equity will be used to refund the series 2005 bonds.

The Rating Outlook is Stable.

SECURITY

The fixed-rate series 2014 bonds are general obligations of the college and secured by a mortgage on the 40 Rector Street Property and a pledge of unrestricted revenues. Bond documents include a debt service reserve fund, current debt service coverage covenant, and an additional bonds test.

KEY RATING DRIVERS

Limited Operating Flexibility: The 'BB' rating reflects MCNY's track-record of positive GAAP-based operating performance and financial cushion that offers some, but limited, capacity to absorb budgetary shocks. Partially offsetting factors include MCNY's small size; narrow market position in a competitive operating environment; modest enrollment dips in the last two fall semesters; a high pro forma debt burden; and significant student revenue dependence coupled with limited tuition raising flexibility.

Small, Tuition-Dependent College: Similar to many private colleges, MCNY has high dependence on student-derived income, making enrollment management and expense controls critical to generate balanced operations and positive debt coverage. MCNY's small enrollment base makes it susceptible to enrollment declines, although concern is somewhat offset by the college's flexible cost structure, predominantly part-time faculty and no union presence.

Adequate Balance Sheet: MCNY has slim but adequate balance sheet resources for the rating category. Available funds at Dec. 31, 2013 was $27.4 million, equal to a solid 104% of operating expenses and a slimmer 35% of pro forma debt ($73.5 million). Excluding college plans to make equity contributions of about $10 million at closing or within fiscal 2015, ratios remain consistent with the rating category at about 24% to debt and 65% to expenses.

Historically Positive Margins: MCNY generated solid GAAP-based operating margins over the past five years. Management projects another positive year for the fiscal year ending Dec. 31, 2014, although not as strong as the solid 8.5% margin in fiscal 2013.

High Debt Burden: MCNY's high debt burden is a credit concern. Current 2013 debt service ($3.9 million, primarily operating leases) was 13.8% of operating revenues, which Fitch considers high. Post issuance carrying charges will be higher. The college's track-record of generating positive debt service coverage only partially offsets this factor.

MCNY is under contract to close on a $5.585 million loan related to academic space in the Bronx, which has a 2020 bullet payment. The college will either pay or refinance this bullet. Fitch believes MCNY has limited remarketing capacity at this time. However, it has slim but adequate reserves - even after planned equity contributions - to cover the loan payment upon maturity.

RATING SENSITIVITIES

Persistent Enrollment Volatility: Enrollment declines would negatively pressure financial performance and debt service coverage, leading to downward rating pressure. The college has very high reliance on student-generated revenues.

Failure to Grow Financial Resources: A gradual increase in balance sheet resources over time is expected to at least partially replenish equity contributions, and therefore support financial flexibility, and manage the loan bullet maturity in 2020. Significant declines in financial resource could pressure the 'BB' rating.

Dependence on Federal Programs: MCNY's students are highly dependent on federal grants and loans to pay tuition, and therefore changes in program rules and regulations have greater effect on the college than many other institutions.

CREDIT PROFILE

Founded in 1964, MCNY is a private, not-for-profit institution that offers certificate programs and associate and bachelor's degrees, as well as master's degrees in education, management, public affairs and administration. The college is accredited by the Middle States Association of Colleges and Schools, most recently reaffirmed in 2009 for a 10-year term. Enrollment in fall 2014 was about 1,228 students, of which 73% were undergraduates.

Students are largely adult, non-traditional commuter students with an average age of 33-35 years. As a result, courses are structured to be accessible to working adults (day, evening, weekend) and include distance-learning components. The college operates three full semesters each academic year, which allows students to complete degrees under an accelerated time frame. Each field of study follows a cohort model whereby entering cohorts are recruited for each program three times a year to facilitate peer learning communities and support student retention.

The college presently operates from its main Manhattan campus and an extension center in the Bronx, both o which are leased facilities. Bond proceeds will be used to acquire three upper floors and a portion of the first floor at 40 Rector Street (roughly 1.9 miles away from the current site) to relocate the Manhattan operations. Additionally, the college entered into an agreement in August 2013 to purchase space in a building now under construction in the Bronx that is approximately 0.3 miles away from the existing extension center. The Bronx project is being financed with a loan from Goldman Sachs (discussed below).

TUITION-DEPENDENT INSTITUTION

Similar to many other private colleges, MCNY is highly dependent on student-generated revenues, consistently about 90% of unrestricted operating revenues. This dependence underscores the importance of effective enrollment budgeting and management.

Fall semester headcount ranged from 1,085 in 2009 to 1,277 in 2012. There was a 1.7% dip in fall 2012 to 1,255, and another 2.15% dip in fall 2014 to 1,228. The declines are a concern, although current enrollment levels are comparable - or stronger - than some in the last five years. MCNY's small size and academic niche make it highly susceptible to enrollment fluctuations. This concern is only partially offset by the college's flexible cost structure of predominantly part-time labor force and no union presence. While fall 2014 enrollment trended behind the prior year, overall management reports the college remains within budget.

HISTORICALLY POSITIVE MARGINS

After some turbulent financial years between 2005 and 2007, MCNY has generated operating surpluses since fiscal year 2009, averaging a solid 9.4% over that five year period. The fiscal 2013 operating margin, which Fitch adjusted for non-recurring investment returns, was solid at 8.5%. Management again projects balanced operations for the fiscal year ending Dec. 31, 2014, although it expects results will be lower than fiscal 2013. Additionally, management indicated that very moderate tuition increases of about 1%-2% are being contemplated going forward, which could lead to some margin compression.

ADEQUATE FINANCIAL CUSHION

MCNY's balance sheet has improved significantly in recent years, driven primarily by operating cash flow retention. The college is not historically a large fundraiser. Fitch defines available funds (AF) as cash and investments less permanently restricted net assets. As of Dec. 31, 2013, the most recent audit date, AF was $27 million, equal to 104% of operating expenses, and 97% of then-outstanding debt and operating leases. Fitch views these ratios as atypically strong for a 'BB' rated private college.

However, MCNY plans to make equity contributions of about $10 million toward the Rector Street renovation and purchase, the Bronx site purchase, and the series 2005 refunding. Fitch adjusted fiscal 2013 AF for these equity contributions, which are expected to be made at closing and during fiscal 2015. Post issuance, adjusted AF of about $17 million is equal to 65% of pro forma debt ($73 million) and 23% of fiscal 2013 operating expenses. Fitch considers these ratios solid for the rating category, but notes that the nominal amount is small compared to many other colleges, and that MCNY may use unrestricted reserves to pay the $5.585 million bullet maturity in 2020.

Fitch believes MCNY's ability to manage refinancing risk is limited, which makes building financial resources over time an important factor in maintaining the rating.

HIGH DEBT BURDEN

For the fiscal year ending Dec. 31, 2013, current debt service of $3.9 million was largely related to the college's facility leases. This represented 13.8% of fiscal 2013 operating revenues, which Fitch considers high. Pro forma maximum annual debt service (MADS) is about $4.7 million, excluding the loan bullet maturity discussed previously, and largely level through maturity. This results in an even higher high debt burden of about 16%.

The $5.585 million loan from Goldman Sachs, related to the Bronx location, is expected to be a fixed-rate, interest-only obligation due in 2020. At that time the college will either refinance or pay the loan in full. Pro forma debt burden including the bullet maturity represented an exceptionally high burden of 33% of fiscal 2013 operating revenues.

BOND AND LOAN SECURITY PROVISIONS

Based on draft documents, the series 2014 bonds will have a current debt service coverage requirement of at least 1.1x starting in fiscal 2016, and 1.2x in fiscal 2017 and thereafter. Fitch understands that the documents will include a provision for hiring a consultant in the event coverage tests are not met, thus providing some time to return to covenanted levels. Failure to meet such debt service coverage provisions would result in default and possible debt acceleration. The 2014 bonds do not have a liquidity requirement. An additional bonds test has two parts: achieving at least 1.2x current debt service coverage for each of the most recent two consecutive years, and projections by a consultant acceptable to the trustee that coverage in the first two years after project completion would be at or greater than 1.2x. The college does not have any other debt plans at this time.

There are preliminary bank loan documents for the separate Bronx facility financing. The loan could be accelerated for various reasons, including failure to meet any other debt obligation (principally the series 2014 bonds), loss of MCNY's academic accreditation, or failure to meet annual liquidity requirements. After the final loan closure (expected in February, 2015), MCNY must demonstrate at its fiscal year end, $10 million of net assets, of which $5 million must be liquid. Fitch does not rate the bank loan.

POSITIVE DEBT SERVICE COVERAGE

Much of the series 2014 debt service will be offset in the college's budget by existing facility lease payments. The college expects that, long-term, facility cost escalations will be contained due to the two projects. Maintenance of solid operating margins and positive debt service coverage are critical, given MCNY's slim balance sheet, planned equity contributions, high student fee reliance, and high debt burden.

Current fiscal 2013 debt, based on adjusted operating results, was a solid 1.7x. Coverage of pro forma MADS ($4.7 million) would have been 1.4x, still a solid level for the rating category. As expected, fiscal 2013 operations do not cover MADS (about $9.7 million) when the 2020 bullet maturity is included. That coverage would be closer to 0.7x, highlighting the importance of growing balance sheet reserves over time.

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 16, 2014).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Rating Guidelines for Private Colleges and Universities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=33331

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=924435

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