OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on $100.9 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 high dependence on tuition revenue, a competitive operating environment and high debt burden.

CONSISTENT SURPLUSES: MICA generated its eighth consecutive positive margin in fiscal 2014. The strong surplus for fiscal 2014 coupled with gifts and market-driven gains drive growth in balance sheet resources, but resource levels to debt remain only adequate for the 'BBB' category.

ERRATIC ENROLLMENT: Inconsistency in the incoming class drives MICA's irregular enrollment patterns. As such, a smaller than expected freshmen class in fall 2013 tempered growth in fiscal 2014 net tuition revenues. Strong retention and stable tuition discounting alleviated some pressure. Positively, management budgets enrollment conservatively.

HIGH, BUT MANAGEABLE, DEBT BURDEN: MICA's debt burden remains high, as anticipated, but offset by strong debt service coverage and solid surpluses. Positively, the college has no future 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's maintaining favorable demand trends given its high reliance on student-generated revenues. Any material shift in enrollment or operating expenses could impact 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 number of graduate degree programs and continuing study non-credit courses. MICA's fall 2014 headcount enrollment totaled 2,293 students, with estimates of a slightly lower headcount enrollment for fall 2015.

CAPABLE MANAGEMENT TEAM

The extensive experience of MICA's senior management team has provided continuity during the new president's first year allowing for a smooth transition. While some additional changes in senior management are expected or have already taken place, the collective experience of senior management and the 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 demonstrating MICA's established fund-raising culture. MICA's restructuring of the fundraising department and recent addition of new development leadership is preparing for campaign readiness mode though no capital campaign is expected for the next 18 - 24 months.

STRONG OPERATING PERFORMANCE

MICA's audited fiscal 2014 (May 31 year-end) results reflect another year of positive operating results. MICA's 3.4% operating margin in fiscal 2014, inclusive of the endowment distribution, narrowed from 5.1% in fiscal 2013, but remains sound.

MICA's fiscal 2014 operating margin remains strong for the 'BBB' rating category due to conservative enrollment planning and budgeting, including depreciation and contingency reserves, and implementation of various cost cutting measures. MICA still met its enrollment budget in fiscal 2014 though it was below management's expectations.

According to management, unaudited fiscal 2015 operating margins are positive due to increased tuition, level discounting and enrollment growth from strong retention and a large fall 2014 freshmen class. MICA management noted that they are still cautious about enrollment in fall 2015; therefore, the base budget for fiscal 2016 is not expected to grow.

Fitch views positively MICA's historically conservative budgeting of tuition revenues with actual enrollment consistently coming in ahead of budgeted targets.

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 87.5% of the college's unrestricted operating revenues. MICA realized slower growth (1.3%) in net tuition revenues in fiscal 2014, following 4.7% in fiscal 2013. This is largely due to fall 2014's smaller incoming class and a large graduating class the same year. Favorably, MICA was able to maintain stability in the tuition discounting rate.

CONSERVATIVE ENROLLMENT BUDGETING

MICA has a small but stable enrollment base with total headcount enrollment growing a modest .87% or 20 students to 2,293 in fall 2014. Headcount is largely undergraduate (81%) with about 1,846 total undergraduate full-time and part-time students growing 3.8% over the prior year. The graduate level grew 1.33% to 382 over the prior year.

Conservative budgeting has allowed the college to weather uneven freshmen classes in prior years. Dips in undergraduate full-time equivalent enrollment (FTE) were offset mainly by growth in graduate FTEs as MICA added graduate programs over several years. However, MICA has achieved targeted graduate enrollment and it is expected to flatten out near-term.

Management anticipates some weakening in fall 2015 headcount enrollment due to recent protests in the city of Baltimore occurring at the same time deposits came due and may have impacted students' decision to enroll at MICA. Management, therefore, is anticipating a 10% smaller incoming freshmen class (around 405 students) compared to fall 2014 based on deposits received to date.

Positively, MICA pro-actively reduced its enrollment budget by about 50 students for fiscal 2015 based on deposits actually received ahead of adopting its final budget. MICA also established a contingency reserve to account for further summer melt, in addition to the normal 7-8% budgeted.

MICA's ability to maintain a stable financial profile, irrespective of any material decline in enrollment, will continue to be critical to the rating.

ADEQUATE LIQUID RESOURCES

Fiscal 2014 available funds, defined as total cash and investments less permanently restricted net assets, total $57.5 million which is a substantial 17% increase over the prior year fueled by operating surpluses and market-driven growth in endowment assets.

While MICA's 2014 available funds balance to unrestricted operating expenses (74.5%) is in line with the 'BBB+' peer group, it is still weaker relative to pro-forma debt (53.6%).
Pro-forma debt ($107.4 million) is inclusive of the additional liability ($4 million) for a New Markets Tax Credit issued in early fiscal 2013.

However, 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 (but not substantially mitigate) reliance on student-generated revenues.

HIGH DEBT BURDEN

The college's debt burden remains a credit concern. Maximum annual debt service consumes a high 9.3% of fiscal 2014 revenues, similar to fiscal 2013. Coverage narrowed due to tighter margins but remains sound at 1.7x and mitigates this concern. Further, no new debt plans are expected over the next 1-3 years.

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

Also, the housing portion of the financed projects should generate additional net revenues to provide some offset to debt service. Effective fall 2014, MICA's student-housing policy required that both freshmen and sophomore classes reside on campus. The new living requirement has achieved full occupancy levels as planned.