OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on $98.9 million Maryland Health and Higher Educational Facilities Authority (MHHEFA) revenue bonds issued on behalf of the Maryland Institute College of Art (MICA, or the college).

The Rating Outlook is Stable.

SECURITY

The bonds are an unsecured, absolute and unconditional general obligation of the college, payable from all legally available funds.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'BBB+' rating reflects MICA's well-established niche as a private arts and design college, strong financial performance driving adequate liquidity levels, and capable management team. Offsetting credit factors include enrollment challenges, high dependence on tuition revenue, a competitive operating environment and high debt burden.

CONSISTENT SURPLUSES: MICA generated its ninth consecutive positive margin in fiscal 2015. Market-driven losses despite strong surplus operations for fiscal 2015 drive slower growth in balance sheet resources, but resource levels-to-debt remain adequate for the 'BBB' category.

ERRATIC ENROLLMENT: Inconsistency in the incoming class drives MICA's irregular enrollment patterns. A smaller than expected freshmen class in fall 2015, which continued in fall 2016, is expected to temper growth in fiscal 2016 and 2017 net tuition revenues. Strong retention and stable tuition discounting alleviates some pressure. Positively, MICA budgets enrollment conservatively and exhibits strong expense management practices.

HIGH, BUT MANAGEABLE, DEBT BURDEN: MICA's debt burden remains high but is offset by strong debt service coverage due to solid surpluses. Positively, the college has no additional debt plans and typically limits debt issuance to revenue-generating projects, and also receives state capital aid in certain years.

RATING SENSITIVITIES

DEMAND-DRIVEN OPERATIONS: Rating stability is predicated on Maryland Institute College of Art improving demand trends over time given its high reliance on student-generated revenues. In the aftermath of another material shift in enrollment, the inability to manage expenses which adequately offset revenue losses would have a negative impact on operating performance and drive a rating or Outlook change.

BALANCE SHEET PRESERVATION:

A material shift in liquid resources relative to Maryland Institute College of Art's large debt load could negatively impact the rating.

CREDIT PROFILE

MICA, founded in 1826, is a nonprofit, fully accredited college specializing in the visual arts located in the Bolton Hill neighborhood of the city of Baltimore, Maryland. MICA offers a four-year undergraduate fine arts degree, with 15 concentrations offered in a wide range of disciplines and subject areas, as well as 19 graduate degree programs and continuing study non-credit courses. MICA's fall 2015 headcount enrollment dropped 5% to 2,221 students which management believes to be largely event-driven due to a smaller incoming class after the civil unrest in Baltimore in May 2015. Management is anticipating another small incoming class for fall 2016, compared to prior years, due to continued news associated with last May's events.

CAPABLE MANAGEMENT TEAM

The extensive experience of MICA's senior management team has provided continuity during the new president's first two years, allowing for a smooth transition, and the collective experience of senior management and the governing board have demonstrated MICA's ability to execute long-range goals during the transition.

MICA completed its long-standing capital campaign and essentially met its campaign goal by raising $149.6 million by early fiscal 2015, a reflection of its established fund-raising culture. After restructuring the fundraising department, MICA is preparing for campaign-readiness mode, though no capital campaign is expected for the next 18 - 24 months.

HIGH TUITION DEPENDENCE

Student-generated revenues are by far the dominant revenue source for MICA, as is the case for many other private colleges and universities, accounting for a high 86.4% of the college's unrestricted operating revenues. MICA realized strong growth (6%) in net tuition revenues in fiscal 2015 after realizing a large incoming class.

Because of smaller incoming classes in both fiscals 2016 and 2017, MICA will need to maintain stability in the tuition discounting rate, which is becoming more challenging given the competitive operating environment.

CONSISTENTLY POSITIVE OPERATIONS

MICA's audited fiscal 2015 (May 31 year-end) operations reflect strongly positive operating results. MICA's 9.8% operating margin, inclusive of the endowment distribution, improved from 3.4% in fiscal 2014 largely due to strong growth in tuition revenues, attributable to a large incoming freshmen class in fall 2014, tight controls on tuition discounting and a stable expense base.

Projected fiscal 2016 operating results will be lower than fiscal 2015 due to the dip in enrollment, but still positive according to management, which is sound for the rating category. Positive results are attributable to MICA's conservative enrollment planning and budgeting, including depreciation and contingency reserves, and implementation of various cost-cutting measures. MICA proactively revised down its fall 2015 enrollment budget soon after it realized fewer than planned freshmen deposits as a result of civil unrest that took place near campus in the city of Baltimore in May 2015. Favorably, MICA managed to meet its adjusted enrollment budget for fiscal 2016.

MICA's weaker freshmen deposits for fall 2016 continue to reflect spill-over from the events in May 2015. MICA once again revised its enrollment budget before the final fiscal 2017 budget was adopted. Given the concerns about enrollment in fall 2016, management is again maintaining a level base budget for fiscal 2017, taking several steps to ward off summer melt and preparing to make further mid-year budget adjustments if necessary.

MICA's ability to adequately manage its operations in fiscal 2016 by modifying its enrollment budget (which did materialize as planned) is viewed positively. Fitch will continue to monitor MICA's progress in fiscal 2017 given that another enrollment dip is expected; however, the college will need to stabilize undergraduate enrollment in future years given the sharply competitive operating environment which remains a concern.

The ability to maintain a stable financial profile, regardless of any material decline in enrollment, is critical to the rating.

ADEQUATE LIQUID RESOURCES

Fiscal 2015 available funds, defined as total cash and investments less permanently restricted net assets, total $59.7 million, increasing modestly over the prior year. Strong surplus operations were offset by market-driven losses on endowment assets.

While MICA's 2015 available funds balance-to-unrestricted operating expenses (75.7%) is in line with the 'BBB+' peer group, it is still weaker relative to pro forma debt (56.8%). Pro forma debt ($105.2 million) includes the additional liability ($4 million) for a New Markets Tax Credit issued in early fiscal 2013. Both metrics remain in line with the 'BBB' category for private colleges and universities; however, liquidity relative to debt is below expectations for the 'BBB+' rating.

While a material shift in liquid resources relative to MICA's large debt load could negatively impact the rating, upward rating movement is contingent upon MICA's ability to grow available resources, allowing the college to ease some of its reliance on student-generated revenues.

HIGH DEBT BURDEN

The college's debt burden remains a credit concern. Maximum annual debt service consumes a high 8.3% of fiscal 2015 revenues but continues to moderate from prior years. Coverage also improved in fiscal 2015 to 2.8x due to stronger margins partly mitigating any concern. Further, no new debt plans are expected over the next 1-3 years. MICA anticipates coming to market later this year with a refunding bond issue for savings.

The college's debt portfolio is 100% fixed-rate, which Fitch views as appropriate for the 'BBB' category.