OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on approximately \$31.5 million of outstanding revenue bonds issued by the Mayor and Common Council of Westminster County, MD on behalf of McDaniel College (McDaniel)

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'BBB+' rating reflects McDaniel's solid financial cushion, demonstrated fundraising ability, and track-record of generating healthy debt service coverage from operations. Counterbalancing factors include limited revenue diversity, exposure to variable-rate debt, tuition discounting pressures, and a history of weak operating performance on a full accrual basis.

SOLID FINANCIAL CUSHION: McDaniel's financial cushion remains solid for the 'BBB' rating category and continues to provide the college with sufficient flexibility to handle a disruption in operating revenues or unexpected increase in expenses.

ENROLLMENT CHALLENGES PERSIST: In fall 2015, undergraduate enrollment, which drives the majority of net tuition and fee revenue, remained relatively stable from fall 2014 levels. Given the highly competitive environment, enrollment challenges persist, requiring management to implement various cost-saving initiatives in order to meet a balanced budget fiscal year-end goal. Graduate enrollment declined for the fifth consecutive year, which is a concern; however, Fitch notes that enrollment declines in graduate programs appear to be relatively manageable from a budgetary perspective.

MANAGABLE DEBT BURDEN: Maximum annual debt service (MADS) of approximately \$3.7 million represented a moderate but manageable 5.8% of total unrestricted revenues in fiscal 2014. Additionally, Fitch views McDaniel's solid track-record of healthy debt service coverage coupled with the college's lack of significant near-term debt plans favorably.

EXPOSURE TO VARIABLE-RATE DEBT: McDaniel's fairly significant variable-rate debt exposure (approximately 33% of outstanding debt) is partially mitigated by the college's level of available funds and history of managing the risks associated with this debt structure.

RATING SENSITIVITIES

OPERATIONAL FLEXIBILITY TO DRIVE PERFORMANCE: Fitch expects McDaniel College to maintain its overall solid financial profile despite persistent enrollment pressure. Management has implemented several cost reduction initiatives and revenue enhancements that are expected to produce a balanced budget at fiscal year-end. Any material balance sheet erosion or weakened operational metrics would be viewed negatively.

CREDIT PROFILE
McDaniel College is a private liberal arts college located on 136 acres of land in Westminster, MD, which is approximately 31 miles northwest of Baltimore and 56 miles north of Washington, D.C.

RATING AFFIRMATION OF 'BBB+'
McDaniel's balance sheet resources continue to anchor the rating at 'BBB+'. As of June 30, 2014, available funds, defined by Fitch as cash and investments not permanently restricted, totaled \$72.4 million, which was improved from fiscal 2013's \$60.6 million. This covered fiscal 2014 operating expenses and long-term debt by 115.6% and 150.4%, respectively, both considered solid for the 'BBB' rating category. Fitch notes that the college's balance sheet strength is partially a reflection of its fundraising efforts, with two successful capital campaigns completed in each of the past two decades.

In fiscal 2014, McDaniel generated a 2.3% operating margin (adjusted for the full endowment payout), which was improved from fiscal 2013's negative 0.5% operating margin and represents the first positive margin for the college in the last five fiscal years. Management attributes the improved performance to continued undergraduate enrollment growth and stability along with prudent expense management practices.

Improved operations supported healthy coverage of pro forma MADS of 2.6x in fiscal 2014, which is improved from 2.2x in fiscal 2013. Fiscal 2015 interim performance points to continued growth in revenue generated from net tuition and fees and relative financial stability as management has implemented several cost-containment and revenue-enhancing initiatives such as labor and productivity cost controls, combining certain office space, and instituting a new graduate student fee, among other things. Approximately one-third of McDaniel's outstanding debt is variable-rate, which is considered relatively high for the 'BBB' rating category. The variable-rate debt consists of a private bank placement held by BB&T Bank with an initial term expiring in 2020 (recently amended from 2017). Any concern related to the potential for debt repayment on an accelerated timeframe is mitigated somewhat by McDaniel's sufficient balance sheet resources and satisfactory headroom under the financial covenants.

Total undergraduate enrollment increased slightly by 0.8% in fall 2015, which continues on the prior year's 2.5% enrollment improvement. Fitch believes revenue growth will be a longer-term challenge as McDaniel competes for students in a highly competitive environment. Graduate enrollment declined for a fifth consecutive year to 1,567 from 1,669 (down 6.1%). Although a credit concern, Fitch notes that enrollment declines in graduate programs appear to be relatively manageable from a budgetary perspective. Importantly, management is focused on stabilizing graduate enrollment and continues to be watchful regarding expenses and overall revenue of the program.