OREANDA-NEWS. Fitch Ratings has upgraded the rating on approximately $181 million of Private Colleges and University Authority series 2014 bonds issued on behalf of Savannah College of Art and Design (SCAD) to 'BBB+' from 'BBB'.

The Rating Outlook has been revised to Stable from Positive.

SECURITY

The bonds are a general unsecured obligation of the college.

KEY RATING DRIVERS

UPGRADE TO 'BBB+': The rating upgrade reflects this art and design institution's improved credit profile driven by a continued growth of balance sheet resources, consistently healthy operations, and strong student demand. Counterbalancing factors include a very high dependence on student revenues (96.6% of fiscal 2015 operation revenues), an elevated debt burden, and limited fundraising.

POSITIVE OPERATIONS: SCAD has generated a positive GAAP-based operating margin in each of the past five fiscal years (including 17.5% in fiscal 2015), driven by enrollment growth, modest tuition discounting, and prudent expense management. SCAD benefits from a non-tenured faculty structure that provides expense flexibility.

IMPROVING BALANCE SHEET: SCAD's balance sheet has improved significantly in recent years reflecting the institution's operating surpluses. 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.

ENROLLMENT GROWTH: Enrollment growth is driven by strategic recruiting efforts and programmatic offerings that are aligned with student and market demand. SCAD's relatively large enrollment size for the 'BBB' rating category mitigates the risk of modest enrollment shifts on the operating budget.

CONSERVATIVE DEBT STRUCTURE: SCAD's series 2014 refunding bonds significantly reduced its exposure to variable rate debt and eliminated associated counterparty risk. Maximum annual debt service (MADS) was covered by a solid 3.2x from fiscal 2015 net operating income; and, there are no further debt plans over the near term.

RATING SENSITIVITIES

IMPROVING FINANCIALS: Sustained operating surpluses leading to further improvement in liquidity metrics could result in positive rating action on Savannah College of Art and Design over time.

NOTICEABLE ENROLLMENT FLUCTUATIONS: Unmanaged enrollment volatility, though not anticipated, would negatively pressure the rating given the institution's significant reliance on student-generated revenue.

CREDIT PROFILE

Founded in 1978, SCAD is a private, not-for-profit institution 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 reaffirmed for a 10-year term through 2020.

In addition to its main campus in Savannah, Georgia, SCAD maintains campuses in Atlanta and Hong Kong, the latter of which has facilities operating under a lease. The college also offers a residential study-abroad program in Lacoste, France and maintains an e-Learning enterprise. All of the campuses are accredited by SACS-COC, with the Hong Kong campus additionally accredited by the Hong Kong Council for Accreditation for Academic and Vocational Qualifications.

TRACK-RECORD OF OPERATING SURPLUSES

SCAD has generated a positive GAAP-based margin in each of the past five fiscal years, averaging a solid 13.4% annually from fiscal 2011 to 2015. The college registered a 17.5% margin in fiscal 2015 and management expects to generate a positive operating margin in fiscal 2016.

Total operating revenues increased by 6.2% in fiscal 2015 over fiscal 2014 reflecting enrollment growth and modest tuition discounting. At the same time, SCAD's solid expense controls included renegotiations of existing contracts, maintenance of unfilled positions, and the elimination of staff sabbaticals. The college benefits from a non-tenured faculty structure with faculty working via one-year contracts which provides a high level of expense flexibility.

IMPROVING FINANCIAL CUSHION

SCAD's balance sheet has improved in recent years. Available funds (AF), defined by Fitch as cash and investments less permanently restricted net assets, grew by 25% over the prior year, to approximately $192 million as of June 30, 2015. Fiscal 2016 is expected to show another year of healthy growth in AF.

Management attributes recent AF growth to solid profitability and strong investment returns. Investments include $55 million of endowed funds and $30 million of working capital. The college's balance sheet is very liquid, with only 5% of the portfolio allocated to alternative assets. Management has a goal of increasing the college's endowment assets by $30 million annually through fiscal 2020.

At June 30, 2015, AF covered fiscal 2015 operating expenses and pro forma long-term debt by 68.6% and 85.3%, respectively. Both ratios are consistent with Fitch's 'BBB' category medians for private colleges and universities. Based on unaudited results, SCAD projects another sizeable growth in financial cushion in fiscal 2016.

GROWING ENROLLMENT

Fitch views SCAD's ability to attract and retain students as a critical factor, as 96.6% of fiscal 2015 revenues are generated from student-generated revenues. Total enrollment stood at 12,456 in fall 2015, up 4% from the prior year and 12.6% ahead of fall 2011. Preliminary admissions statistics for fall 2016 appear positive and suggest that the college is on track to register incremental growth. Enrollment growth has reflects recruitment initiatives and market based programmatic offerings.

MANAGEABLE LEVERAGE POSITION

The series 2014 issue lowered SCAD's exposure to variable rate debt from 90% of total debt to roughly 10% which is viewed positively by Fitch. SCAD's total debt of $225 million includes $180 million of fixed rate bonds, a $20 million variable-rate direct bank placement (which includes a put option that will likely be exercised in fiscal 2018), as well as miscellaneous loans and capital leases. There are no new debt issuance plans over the near term.

Average annual debt service (AADS) is level at around $12.3 million through maturity (2044) and equates to a modest 3.6% of fiscal 2015 operating revenues. MADS of $32.1 million (which includes the payment of the variable rate note in 2018) equates to 9.5% of fiscal 2015 revenues. In fiscal 2015, AADS coverage was a strong 8.5x while MADS coverage was a solid 3.2x.