OREANDA-NEWS. Fitch Ratings has upgraded to 'BB-' from 'B+' the rating on approximately \$10.1 million of series 2007 North Carolina Capital Facilities Finance Agency educational facilities revenue refunding bonds, issued on behalf of Brevard College Corporation (Brevard).

The Rating Outlook is revised to Stable from Positive.

SECURITY

The bonds are a general obligation of the college, payable from all legally available funds.

KEY RATING DRIVERS

IMPROVING FINANCIAL OPERATIONS: The rating upgrade reflects four years of positive GAAP operating margins, and the lifting of the college's accreditation probation in July 2014.

NET TUITION REVENUE GROWTH: Increased enrollment in fall 2012 and 2013 has supported net tuition revenue growth, although it remains pressured by scholarship discounts. Enrollment remained small but stable at 705 students in fall 2014 (fiscal 2015), with management projecting modest enrollment growth for fall 2015 (fiscal 2016). The college's small size and limited balance sheet heighten its vulnerability to demand shifts and enrollment volatility.

LIMITED BALANCE SHEET: Brevard's fiscal 2014 balance sheet ratios, measured per Fitch criteria, improved but remain very low.

MANAGEABLE DEBT BURDEN: The college's pro forma maximum annual debt service (MADS) debt burden, including a planned \$6.38 million USDA loan for student housing, is high to moderately high at 7.6% of fiscal 2014 revenues. Estimated MADS coverage, however, remained solid at about 3.0x. For the last five fiscal years, MADS coverage of level debt service has been positive.

RATING SENSITIVITIES

ENROLLMENT TRENDS: Enrollment declines combined with failure to grow net tuition revenue could result in a negative rating action.

BALANCE SHEET: Low balance sheet ratios continue to constrain Brevard's rating; weakening in balance sheet ratios could cause a negative rating action.

ADDITIONAL DEBT MANAGEABLE: Brevard's debt level remains manageable including a USDA loan for student housing - which management expects will be financially self-supporting. However, Fitch views the college as having very limited additional debt capacity at this time. Positive GAAP operating margins and solid debt service coverage are needed to support the rating.

CREDIT PROFILE

Brevard is a small four-year, private liberal arts college located on 120 acres in Brevard NC, about 140 miles west of Charlotte, NC and about 30 miles southeast of Asheville, NC. All students are undergraduates, and most attend full-time. The college's mission is to provide students a distinctive, experiential learning experience. Brevard is known for its performing arts programs and environmental sciences.

The college was founded in 1853 as a two-year institution, and became a four-year institution in 1995. It is affiliated with the United Methodist Church. The Southern Association of Colleges and School - Commission on Colleges (SACS-COC) removed Brevard from probation in July, 2014, which action Fitch regards positively. The probation began in June 2013 due to financial stress; the current 10-year accreditation runs through 2021.

ENROLLMENT DRIVES OPERATIONS

Enrollment increased in both fall 2012 and 2013 to a headcount of 701, and then stabilized at 705 students in fall 2014. The college had expected growth, and continues to focus on modest annual enrollment increases. Brevard's strategic plan has a goal of building to 1,000 students by fall 2019, which Fitch views as somewhat aggressive. Brevard's operating revenues remain heavily reliant on student revenues, typically about 74%, which is similar to other small liberal arts colleges.

After dropping to a low of 627 headcount students in fall 2011, enrollment gradually improved to 701 in fall 2013. This increase was supported by a record fall 2013 entering freshman class of 308 students, well above the 225-273 class sizes realized in the prior four years. The fall 2014 entering class was below expectations at 288, but still stronger than most recent years. Management reports that fall 2015 admissions indicators (applications, deposits, campus visits) are again at record levels, and that there is significant focus on matriculating students and growing net tuition revenue through financial aid strategies, encouraging campus visits, and various communication strategies.

Enrollment improvement is largely attributable to strategies focusing on new-student 'fit' at the college, as well as retention initiatives. The college's freshman-sophomore retention rate has been improving, but remains low at about 59% in fall 2014.

Fitch views the ability to successfully achieve both enrollment growth and increases in net tuition revenue as determining operating success long term. The upgrade recognizes multi-year progress on enrollment, net tuition revenue growth and positive operating performance, and expectations that such performance will remain stable in fiscal years 2015 and 2016.

POSITIVE OPERATING PERFORMANCE

GAAP operating results were positive in the last four years, and help support the rating upgrade. Fiscal 2014 operating results were a solid \$2.1 million (12% margin), supported by enrollment growth and increased net tuition revenue.

This compared to a \$2.9 million operating surplus in fiscal 2013, which Fitch does not consider to be a direct comparison, as it includes recognition of an estimated \$2.5 million non-cash bequest. When adjusted for the bequest, the 2013 margin is close to break-even at \$479,000 (0.2% margin). The margin in fiscal 2012 and 2011 was also near break-even. Management has exercised significant expense management during the last several fiscal years, including salary reductions and freezes, curtailment of retirement matching contributions, and maintaining position vacancies.

In 2014, the college provided modest salary increases and began making strategic investments in plant and programs. However, Fitch understands no new faculty positions have been added, and no salary increases were awarded in fiscal 2015. Controlling tuition discount remains a significant challenge given Brevard's highly competitive and cost-conscious market - the undergraduate discount rate remains high at nearly 50%.

Positively, Brevard's operating budgets have contained both contingency and working capital reserves, and use conservative enrollment assumptions. Management projects positive GAAP operating results for fiscal 2015, consistent with fiscal 2014, even with flat enrollment and similar discounting. To maintain the rating going forward, Fitch expects positive operating margins to be sustained.

WEAK AVAILABLE FUNDS

Brevard's balance sheet remains very weak, providing minimal financial cushion. At May 31, 2014, available funds (AF), defined by Fitch as cash and investments less permanently restricted net assets, improved to \$2.6 million from slightly less than \$1 million in fiscal 2013. This resulted in two consecutive years that the AF value was positive. However, balance sheet strength remains very weak.

Fiscal 2014 AF was only 16.6% of operating expenses and 14.6% of pro forma debt (\$18 million including the USDA student housing loan). The college has about \$23.5 million of endowment, almost all of which is restricted and thus is not included in the AF calculation. Fitch views Brevard's balance sheet as severely limited.

Brevard's AF ratios are expected to increase in calendar 2015 when an unrestricted bequest - for which related litigation has been resolved - is distributed. Auditors estimated the cash portion of the bequest to the college at \$2.5 million in fiscal 2013. Fitch notes that while Brevard's balance sheet cushion would improve, it remains slim.

DEBT BURDEN REMAINS MANAGEABLE

Brevard's series 2007 bonds are fixed rate with level debt service, maturing fairly rapidly by 2027. In 2014, the college entered into a maximum \$6.38 million, 4% interest rate, USDA loan to build a new 84-bed student residence hall. It expects to start drawing down on the loan in calendar 2015. Fitch estimates pro forma debt at \$18 million (including some leases), and pro forma MADS at \$1.37 million (up from \$1.03 million).

Outstanding MADS was a moderate 5.8% of fiscal 2014 operating revenues. On a pro forma basis that increases to about 7.6%, which Fitch considers high-to moderately high. Positively, the residence project is expected to be self-supporting, housing students currently living in off-campus space rented by the college.

Brevard maintains a \$1.5 million bank line of credit for operating cash flow. Additionally, the college's fiscal 2014 and 2015 budgets each provided \$250,000 to build working cash and reduce dependence on the bank line, which Fitch views favorably. Management projects that part of the budgeted cash reserve will be available at the end of fiscal 2015, and reports that a \$250,000 reserve will again be included in the fiscal 2016 budget.

POSITIVE DEBT SERVICE COVERAGE

Brevard has posted positive debt service coverage for the last four fiscal years, including fiscal 2014. Pro forma MADS coverage was 2.9x in fiscal 2014. This compares to 1.9x in fiscal 2013 (adjusted for a non-cash bequest), 3.0x in fiscal 2012, and 2.2x in fiscal 2011. Pro forma MADS coverage is expected to be positive in the current 2015 budget year.