[September 03, 2014]

Fitch Rates Savannah College of Art and Design Revs 'BBB'; Outlook Stable

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.

SECURITY

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.

RATING SENSITIVITIES

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

CREDIT PROFILE

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 Qualifications.

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 incremental growth.

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 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

2013 Median Ratios for U.S. Private Colleges and Universities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751667

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=864095

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