Fitch Affirms Savannah College of Art and Design Revs at 'BBB'; Outlook Revised to Positive
The Rating Outlook is revised to Positive from Stable.
The bonds are a general unsecured obligation of the college.
KEY RATING DRIVERS
POSITIVE OUTLOOK: The Outlook revision is reflective of this art and design institution's improved credit profile driven by continuing growth in balance sheet resources, consistently healthy operations, and strong demand trends. Counterbalancing factors remain a strong dependence on student revenues (96.5% of fiscal 2014 operation revenues), a high debt burden, and limited fundraising history.
POSITIVE OPERATIONS: SCAD generated a positive GAAP-based operating margin in each of the past five fiscal years (including 18% in fiscal 2014), driven by favorable enrollment trends, well-managed tuition discounting, and prudent expense management. SCAD continues to benefit from a non-tenured faculty structure that provides flexibility to respond to changes in student demand or staffing needs.
IMPROVING BALANCE SHEET: SCAD's balance sheet has improved significantly in recent years, driven primarily by the retention of operating cash flow. Management has used a portion of unrestricted cash reserves toward the college's capital plan in fiscal 2015, and will continue to do so (to a lesser extent) through 2017.
CONTINUAL ENROLLMENT GROWTH: Enrollment continues to grow, aided by 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 continues to minimize the impact of modest enrollment shifts on the operating budget.
IMPROVED LEVERAGE: The issuance of SCAD's series 2014 bonds in fiscal 2015 significantly reduced its exposure to variable rate debt and eliminated associated counterpart risk. There are no further debt plans over the near term.
IMPROVING LIQUIDITY: Savannah College of Art and Design's continued improvement in available funds compared with operating expenses and long-term debt may support upward rating momentum.
NOTICEABLE ENROLLMENT FLUCTUATIONS: Unmanaged enrollment volatility, though not currently anticipated, would negatively pressure the college's financial performance given the college's significant reliance on student-generated revenue, and likely lead to downward rating pressure.
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 was most recently re-affirmed for a 10-year term in 2010.
In addition to its main campus in Savannah, Georgia, SCAD maintains campuses in Atlanta and Hong Kong, the latter of 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-based margin in each of the past five fiscal years, averaging a solid 10% annually from fiscal 2010 to 2014. The college registered an 18% margin in fiscal 2014 and is on track to garner another healthy operating margin in fiscal 2015, based on Fitch's review of unaudited financial statements. Total operating revenues increased by 6% in fiscal 2014 over fiscal 2013, predominantly stemming from a 5% growth in net tuition revenues that was driven by favorable enrollment trends and well-managed tuition discounting.
At the same time, SCAD registered a 3.8% increase in total operating expenses. Cost restraint was realized through various initiatives, including the maintenance of unfilled positions and elimination of faculty sabbaticals. Moreover, the college benefits from a non-tenured faculty structure with faculty working via one-year contracts that may be renewed annually, thereby providing greater fiscal flexibility.
IMPROVING FINANCIAL CUSHION
SCAD's balance sheet has improved in recent years, and continued to do so by the end of fiscal 2014. Available funds (AF), defined by Fitch as cash and investments less permanently restricted net assets, grew by a sizeable 63.8% over the prior year, to approximately \\$153.2 million as of June 30, 2014. Fiscal 2015 is expected to show another year of healthy growth in AF.
Management attributes the 78% year-over-year increase in cash and cash equivalents at the end of fiscal 2014 to conservative planning and spending discipline. The college's balance sheet is very liquid, with alternative assets at 14.6% as of June 30, 2014. Fitch will continue to monitor investment performance as well as whether maintaining high levels of cash are sustainable given the college's capital plan implementation over the next few fiscal years.
AF as of June 30, 2014 covered fiscal 2014 operating expenses and pro forma long-term debt by 58.4% and 61.6%, respectively. Both ratios improved over the levels observed by Fitch at last review and are comparable with Fitch's 2014 medians for 'BBB' category private colleges and universities of 62.9% and 66.6%, respectively. Based on unaudited fiscal 2015 financial statements, the college produced another sizeable operating surplus in fiscal 2015.
Fitch views SCAD's ability to attract and retain students as a critical factor in the rating process since 96.5% of funding (fiscal 2014) is from student-generated revenues. Total headcount enrollment stood at 11,973 in fall 2014, up 1.8% from the prior year and 14.5% ahead of fall 2010. Preliminary admissions statistics for fall 2015 appear positive and suggest that the college is on track to register incremental growth. Fitch positively views SCAD's ability to demonstrate an increasing enrollment base.
Enrollment growth has been aided by recruitment efforts to identify prospective students. Further, SCAD indicates that new programs are developed to reflect student interests, employer needs, market trends, and alumni feedback; and, management is willing to exhaust programs offerings if market relevance or student interest is no longer applicable.
MANAGEABLE LEVERAGE POSITION
The issuance of the series 2014 bonds in fiscal 2015 moderated SCAD's historically high variable rate exposure (from roughly 90% pre-issuance to 10% post-issuance). SCAD's pro forma debt at \\$248.6 million includes the fixed bonds, a variable-rate loan of \\$20 million (which includes a put option that will likely be exercised in fiscal 2018), and minor loans and capital leases. There are no new debt issuance plans over the near term.
Annual debt service on the bonds is level at around \\$11.7 million through maturity (2044). As reported in the capital improvement plan in Fitch's last review, the college maintains two significant non-cancellable operating leases; however, as expected, current annual debt service is still expected in fiscal 2015 to register below the 10.1% recorded in fiscal 2014. The college's pro forma maximum annual debt service (MADS), which incorporates both the series 2014 debt service and the bullet payment associated with the variable-rate note due in fiscal 2018, represented a high 10% of fiscal 2014 operating revenues; however, Fitch notes positively that the balance was covered by a solid 3.3x from fiscal 2014 net operating income.