OREANDA-NEWS. Fitch Ratings has assigned a 'AA-' rating to the approximately \$20.7 million of Private Colleges and Universities Authority (GA) revenue bonds series 2015A and \$17.5 million of Private Colleges and Universities Authority (GA) revenue bonds series 2015B, issued on behalf of Agnes Scott College (ASC).

The bonds are expected to sell via negotiation the week of April 13. Proceeds will refinance and extend a portion of outstanding revenue bonds, refinance a short-term construction note, and pay costs of issuance.

In addition, Fitch downgrades the underlying ratings to 'AA-' on approximately \$62.7 million of outstanding revenue bonds issued by the authority on the college's behalf. The series 2004B bonds are supported by an irrevocable direct-pay letter of credit provided by Wells Fargo Bank, N.A. and are expected to be refinanced.

The Rating Outlook is Negative.

SECURITY

Revenue bonds are unsecured general obligations of the college.

KEY RATING DRIVERS

OPERATING PRESSURES DRIVE DOWNGRADE: ASC is a small independent liberal arts college for women in Decatur, GA. Fitch believes the college's endowment draws to support pressured operations remain unsustainably high despite improvement in recent years. Considerable enrollment growth is needed to achieve operating balance.

STRONG BALANCE SHEET RESOURCES: The 'AA-' rating continues to reflect the college's strong balance sheet resources relative to operating expenses and debt. These resources provide substantial cushion against adverse enrollment or financial trends. However, Fitch believes the current rate of endowment spending could deplete this cushion over time.

NEGATIVE OUTLOOK: ASC's management team is implementing a strategic plan focused on financial sustainability and increasing demand. The Negative Outlook reflects the strategy's significant upfront costs and a high degree of execution risk in light of the college's small size and niche market. However, Fitch believes the new Summit program could improve the college's competitive position and enrollment over time.

RATING SENSITIVITIES

IMPROVING ENROLLMENT: Rating stability at the current level requires improvement in admissions and enrollment measures as expected by management by fall 2016.

SUSTAINABLE OPERATIONS AND DRAW: The endowment draw will remain elevated through fiscal 2016 largely to fund strategic initiatives. Rating stability will depend on the college's capacity thereafter to begin reducing its reliance on endowment spending for operations.

CREDIT PROFILE

Founded in 1889, ASC is an independent undergraduate liberal arts college for women. Its 100-acre campus is located in Decatur, Georgia, about six miles from downtown Atlanta. The college maintains an affiliation with the Presbyterian Church, but is governed by an independent board of trustees. Fitch considers management proactive and engaged.

ENROLLMENT GROWTH NECESSARY

The college's fall 2014 enrollment of 873 remains short of the approximately 1,100 students management estimates are needed to achieve and maintain balanced operations over time. Enrollment has stayed within a narrow band (871 - 915) over the past five years. Fitch believes that generally stable enrollment, despite growth efforts, and continued high tuition discounting (five-year average of 61.3%) indicate limited demand flexibility related to price sensitivity and a niche market.

The strategic plan calls for approximately 26% growth to 1,100 students by 2020, which Fitch considers aggressive. The Summit program is designed to better align the college's offerings with student demand by offering distinctive global learning and leadership development opportunities in addition to the core liberal arts curriculum. Fitch believes the strategy could help distinguish the college from peers and improve its competitive positioning over time. However, the notable programmatic shift entails significant upfront costs and a high degree of execution risk in light of the college's small size and niche market. Fitch will look to fall 2016 demand and enrollment trends as an early indicator of the strategy's effectiveness. Stability at the current rating level will require progress toward sustainable operations through enrollment growth.

OPERATIONS NOT BALANCED

The college's operations remain imbalanced due to insufficient enrollment levels and net student revenues, which account for roughly half of operating revenues. The college typically generates a negative operating margin on a GAAP basis, relying heavily on its endowment to balance operations. Fitch believes the current level of endowment draws to support operations is unsustainable, despite moderate reductions, and could deplete balance sheet resources over time by exceeding average investment returns.

A spending policy has brought the standard endowment draw down to 5.9% (\$15.4 million) in fiscal 2014. However, additional board-approved draws for nonrecurring or long-term expenses increased overall endowment support to \$17.2 million. Higher additional draws of \$3 - 4 million are expected in fiscal 2015 and 2016 to fund initial costs of implementing Summit. Reduction of endowment draws after fiscal 2016 will depend largely on the success of the Summit program in increasing enrollment and net tuition revenue to cover program expenses. To maintain the rating level, Fitch expects the college to be in a position to begin lowering endowment draws after fiscal 2016.

BALANCE SHEET RESOURCES

ASC's strong balance sheet resources are its primary credit strength and provide a significant cushion against adverse operating trends. Available funds, defined by Fitch as cash and investments not permanently restricted, totaled \$219.7 million as of June 30, 2014, up 13% from the prior year due to strong investment returns. Available funds continue to provide strong coverage of operations and debt, equal to 466.4% of fiscal 2014 operating expenses (\$47.1 million) and 297.5% of pro forma debt (\$73.9 million, including non-cancellable operating leases). Flat investment performance year-to-date and continued endowment draws could reduce available funds somewhat in fiscal 2015. Characteristic of institutions with sizeable endowments, ASC maintains significant exposure to alternative, illiquid asset classes including hedge funds, private equity and real estate partnerships. Adjusting for these assets, available funds would still provide solid coverage of expenses and debt.

HIGH DEBT BURDEN

The transaction will reduce debt service by about \$1 million per year, but the college's debt burden remains high, with pro forma MADS (\$4.7 million) consuming 10.4% of fiscal 2014 operating revenues. Pro forma MADS coverage from fiscal 2014 operations is adequate at 1.1x. Coverage is expected to remain generally stable due to use of the endowment draw to offset operating costs. ASC's debt structure will be fairly conservative post-issuance, with approximately 72% of revenue bonds in the fixed-rate mode (remaining series 2009 and series 2015A). The 2015B bonds will initially bear interest at an adjusted index rate and will likely feature a three- or five-year put. Based on ASC's significant balance sheet resources and lack of additional debt plans, Fitch believes the risks attendant to variable-rate and put debt are manageable for the college.