[April 23, 2014]

Fitch Affirms Sarah Lawrence College (NY) Rev Bonds at 'BBB-'; Outlook Remains Negative

Fitch Ratings has affirmed the 'BBB-' rating on approximately $45.45 million of series 2001B and series A civic facility revenue bonds issued by the City of Yonkers Industrial Development Agency, NY on behalf of Sarah Lawrence College (SLC).

The Rating Outlook remains Negative.

SECURITY

Civic facility revenue bonds are secured by tuition revenues and a first lien on the mortgaged property, which is most of the college's real assets. There is no debt service reserve, and the bonds have no coverage, liquidity or additional bonds covenants.

KEY RATING DRIVERS

OPERATING IMBALANCE CONTINUES: The 'BBB-' rating and Negative Outlook reflect minimal progress on reducing college operating deficits in fiscal 2013 but expected improvement in the current 2014 budget year. The college projects break-even cash-basis results by fiscal 2017, which would still be a GAAP-based deficit.

SIGNIFICANT CAPITAL UNCERTAINTY: Fitch views the college as having long-term capital and deferred maintenance pressures, and uncertainty regarding whether funding can be accomplished with gifts, debt, or a combination. Fitch believes the college has no new debt capacity at the current rating.

INSUFFICIENT DEBT SERVICE COVERAGE: Current debt service coverage (primarily interest expense) has been below 1.0x in the last four fiscal years, including fiscal 2013, and possibly for fiscal 2014. Debt service increases $1.3 million in fiscal 2016 when series 2001 principal begins amortizing. Management reports that as needed, current debt service has been covered from available cash and endowment.

FINANCIAL RECOVERY TIED TO ENROLLMENT: Enrollment growth in fall 2013 (fiscal 2014) was consistent with the college's financial plan, which Fitch considers positive. However, uncertainty remains as continued growth needs to be combined with expense constraints and net tuition discount management to materially improve financial operations in fiscal years 2014 and 2015.

STRONG REPUTATION HISTORICALLY SUPPORTS DEMAND: SLC's academic model and strong academic reputation supports relatively stable enrollment but also contributes to high expenses and gross student charges. Demand currently supports the college's 'BBB-' rating in a challenging and competitive environment but may not do so indefinitely.

RATING SENSITIVITIES

OPERATING DEFICIT IMPROVEMENT: Failure to show steady progress in reversing the college's structural budget deficit in fiscal 2014 and 2015 will trigger negative rating actions. Management indicates that fiscal 2014 will show operating improvement, but audited financials are not yet available.

ADDITIONAL DEBT ISSUANCE: Issuance of new debt without a corresponding increase in resources, including both balance sheet cushion and annual net revenues, could trigger a negative rating action. Further, failure to cover current debt service, and rebuild operations to cover MADS in fiscal 2016, will pressure the current rating.

CREDIT PROFILE

Founded in 1926, SLC is a private, liberal arts college located in Yonkers, NY, approximately 20 miles north of midtown Manhattan. Headcount enrollment reached 1,782 in fall 2013, up 2.3% from 1,736 in fall 2012. The growth came from a record entering undergraduate class, which exceeded the college's strategic plan targets. About 1,453 or 82% of students are undergraduates, who reside on campus.

The annual cost of attendance grew 3.2% in fiscal 2013, and another 3.6% in fiscal 2014 to $64,772 for fall 2013. SLC's gross student charges are among the highest of all U.S. colleges. Institutionally, tuition was discounted 39% in fiscal 2013, most from college operating funds. Management notes that its educational delivery model, focusing on small seminars and intensive faculty engagement, results in comparatively high academic expenses. Fitch views SLC's ability to raise student charges as limited by competition, and its ability to further discount tuition limited by operating deficits.

CONTINUED OPERATING DEFICITS

Net tuition revenue has historically provided about 82% of operating revenues, which is not unusual for a liberal arts college with a relatively small endowment (about $75 million in 2013).

Operating losses continued in fiscal 2013, only slightly improved compared to fiscal 2012. The college has been struggling with a structural operating deficit for almost 10 years. In fiscal 2013, the operating margin was negative $5 million (negative 7% of operating revenues), which is only modestly better than the negative $5.2 million in fiscal 2012 (-7.6%). Management projections for the fiscal year ending May 31, 2014 indicate some improvement on a GAAP basis (including depreciation expense of about $4 million).

SLC has not generated positive cash operating reults since fiscal 2010, resulting in current debt service coverage below 1.0x for the last four years, including 0.7x current coverage in fiscal 2013. Management reports that it pays debt service, if needed, from operating cash or unrestricted endowment. Fitch considers this situation unsustainable, and a major factor in retaining the negative outlook. Failure to improve operating results on either a cash or GAAP basis in fiscal 2014 and fiscal 2015 would lead to negative rating actions.

FINANCIAL PLAN

The college budgets on a cash-basis and is in the midst of a five-year (2012-2016) plan to improve financial performance. That plan is based on budgetary results. The plan assumes moderate expense increases and material growth in net tuition revenue from enrollment growth and managed tuition discounting, along with fundraising.

The plan for fiscal 2013 called for negative $3.8 million on a budgetary basis; unaudited results were slightly better at negative $3 million. Plan adjustments for fiscal 2014 or 2015, if any, are not yet available. However, on a GAAP basis the operating deficit of $5 million in fiscal 2013 was not materially better than the prior year at negative $5.2 million. For the current 2014 budget year, the plan calls for a $1.6 million budgetary deficit, which management estimates to be achievable. GAAP projections for fiscal 2014 are not available, but the college expects some improvement depending on annual fund gift levels and how the auditor recognizes gifts. Management currently estimates balanced cash/budgetary operations by fiscal 2017, which would still be negative on a GAAP basis. The college expects to make ongoing revisions to the plan.

MANAGEMENT

The college's president has been in office since 2007. After significant turn-over in the vice president for finance and operations (CFO) position recent years, a new vice president was appointed in 2012. Fitch considers stability in the CFO position, as well as demonstrated board support for exceeding financial plan goals, as essential to improving financial operations. Additionally, Fitch considers turn-over in the admissions vice president position troubling, as enrollment growth plus discount management is a key financial recovery plan component. The prior admissions vice president left in mid-2013 after about a year, and a new VP started in November 2013.

ENROLLMENT UNCERTAINTY REMAINS

The college essentially met its fall 2013 (fiscal 2014) goal of 400 first-time entering freshmen, with an entering class of 427 combined with higher than usual second semester attrition. Enrollment for fall 2014 (fiscal 2015) is less certain, and with a new vice president for enrollment management, anticipates that the recruiting emphasis may shift from the number of new students to a net tuition revenue goal. Fitch will evaluate the fall 2014 enrollment results when they are available. At this time, projections indicate an entering class of 375 first-time freshmen, which is under plan expectations of 425 but is not inconsistent with historical matriculation levels.

POTENTIAL CAPITAL AND DEBT PRESSURES

The college scaled back capital plans in the last year, reconfiguring a less expensive admissions house facility and deferring a potential $35 million student center project until gift funding is available. An analysis of deferred maintenance is still in process, with results expected later in calendar 2014. Management reports that it is also studying a potential debt refinancing; the amount or structure is not yet available.

Given that the college did not achieve current debt service coverage in 2013, meeting current coverage remains uncertain for fiscal 2014, and debt service is scheduled to increase by $1.3 million in fiscal 2016, Fitch believes there is no new debt capacity at the current rating. Over time, new debt issuance is expected to be contingent on gift receipt, a track record of operating surpluses, and endowment growth.

OUTSTANDING DEBT

The series 2001A bonds were converted to fixed rate and have a deferred principal amortization. Current debt service is $3.5 million (mainly interest expense), increasing to MADS of $4.8 million in fiscal 2016. While the debt burden was only moderately high in fiscal 2013 with 4.9% current burden and 6.7% MADS burden, Fitch's focus is on debt service coverage.

The college has not generated current coverage in the last four fiscal years, including 0.7x in fiscal 2013; MADS coverage was even lower at 0.5x. Management reports that operating cash and endowment, as needed, have been used to supplement debt service in recent years. At May 31, 2013, unrestricted/board designated endowment was $25 million. Projections for fiscal 2014 coverage are not available. Fitch views negative debt coverage supplemented from the endowment as unsustainable.

LIMITED BALANCE SHEET

SLC's balance sheet remains weak, but consistent with the rating category. Available funds (AF), defined as cash and investments not permanently restricted, were $26.2 million at the end of fiscal 2013, down from $36.7 million in 2012 and $44.5 million in 2011. The fiscal 2013 decline was largely due to an increase in permanently unrestricted net assets of over $12 million, largely pledge receivables, while cash and investments stayed fairly stable. Fitch's AF calculation does not recognize gift receivables, which should positively influence the AF value as they are received in the next several years.

Fiscal 2013 AF equaled 34% of operating expenses and 53.5% of pro forma debt ($50 million). Fitch includes $2 million of a new capital lease authorization in pro forma debt, but not $7.5 million of working cash bank lines. Fitch views the college's balance sheet ratios as consistent with the 'BBB' rating category but also as a continuing concern.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria', dated June, 2013;

--'U.S. College and University Rating Criteria', dated May, 2013;

--'Fitch Downgrades Sarah Lawrence College (NY) Rev Bonds to 'BBB-'; Outlook Negative, dated April 24, 2013.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827552

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