OREANDA-NEWS. Fitch Ratings has affirmed its 'BB' rating on $67.44 million of revenue bonds, series 2014, issued by Build NYC Resource Corporation on behalf of the Metropolitan College of New York (MCNY).

The Rating Outlook is Stable.

SECURITY

The fixed-rate series 2014 bonds are general obligations of the college and secured by a mortgage on the 40 Rector Street property (now '60 West') and a pledge of unrestricted revenues.

KEY RATING DRIVERS

LIMITED OPERATING FLEXIBILITY: The 'BB' rating reflects MCNY's historical track-record of positive GAAP-based operations, although margins slimmed to break-even in fiscal 2014 and are projected to be slim again in fiscal 2015. The college has limited financial cushion. Other factors constraining the rating include MCNY's small and declining enrollment, narrow market position and local competition, a high debt burden, and significant student revenue dependence.

TUITION-DEPENDENT COLLEGE: MCNY has high dependence on student-derived income, typically 90%, making enrollment management and expense controls critical to generate balanced operations and positive debt service coverage. MCNY's small enrollment base makes it highly susceptible to enrollment declines.

ADEQUATE BALANCE SHEET: MCNY has slim but adequate balance sheet resources for the rating category. Available funds at Dec. 31, 2014 was $23.2 million, equal to a solid 84% of operating expenses and a slimmer 31.8% of debt ($73 million). Adjusting for potential equity contributions of $7.6 million slims the ratios further, although they remain consistent with the rating category.

BALANCED BUT WEAKER MARGINS: MCNY generated solid GAAP-based operating margins for the five years through fiscal 2013, but calendar 2014 results were weaker and essentially break-even. Management projects positive but slimmer margins for the fiscal year ending Dec. 31, 2015.

HIGH DEBT BURDEN: MCNY's high debt burden is a credit concern. Pro forma debt service ($4.8 million, excluding a $5.585 bullet maturity) was a high 17% of operating revenues in 2014. Fitch expects gradual moderation of the debt burden over time.

MCNY recently closed on a $5.585 million loan related to academic space in the Bronx, which has a 2020 bullet payment. The college will either pay or refinance this bullet. Fitch believes MCNY has limited remarketing capacity, but has slim but adequate reserves - even after planned equity contributions - to cover the loan payment upon maturity.

RATING SENSITIVITIES

PERSISTENT ENROLLMENT DECLINES: Continued enrollment declines at Metropolitan College of New York will negatively pressure financial performance and debt service coverage, leading to downward rating pressure. Maintenance of solid debt service coverage is critical to the current rating.

FAILURE TO GROW FINANCIAL RESOURCES: A gradual increase in balance sheet resources over time is expected to partially replenish equity contributions, build operating cushion, and manage the loan bullet maturity in 2020. Significant declines in financial resource will pressure the 'BB' rating.

FEDERAL PROGRAM DEPENDENCES: MCNY's students are highly dependent on federal grants and loans to pay tuition, and changes in program rules have greater effect on the college than many other institutions.

CREDIT PROFILE
Founded in 1964, MCNY is a private, not-for-profit institution offering certificate programs and associate and bachelor's degrees, as well as master's degrees in education, management, public affairs and administration. The college is accredited by the Middle States Association of Colleges and Schools. Enrollment in fall 2015 was 1,190 headcount students, of which about 65% were undergraduates.

Students are largely adult, non-traditional commuter students. Courses are structured to be accessible to working adults (day, evening, weekend) and include distance-learning components. The college operates three full semesters each academic year, using a cohort model.

MCNY presently operates from its main Manhattan campus and an extension center in the Bronx, both leased facilities. Series 2014 bond proceeds of $67.44 million were used to acquire condominium space at 40 Rector Street (now '60 West', roughly 1.9 miles away from the current site) to relocate the Manhattan operations. Additionally, the college closed on a $5.585 million loan agreement in 2015 to purchase space in a building now under construction in the Bronx to relocate the existing extension center.

TUITION-DEPENDENT INSTITUTION
MCNY is highly tuition dependent, consistently about 90% of unrestricted operating revenues. This dependence underscores the importance of effective enrollment management and expense controls.

Enrollment has declined for three consecutive fall semesters, a credit concern. Fall 2015 semester headcount was 1,190 (1,113 FTE), down from 1,277 in fall 2012. Management reports enrollment can be cyclical with the economy given its student base of older, working adults. However, the declines are a concern as operating margins have slimmed significantly. Fitch notes, though, that current enrollment levels remain comparable to past years. MCNY's small size and narrow academic niche make it highly susceptible to enrollment fluctuations.

SLIMMING BUT GENERALLY POSITIVE MARGINS
After turbulent financial years between 2005 and 2007, MCNY generated solid operating surpluses between fiscal year 2009 and 2013, averaging about 9% margins over that five year period. However, the operating margin for fiscal 2014 weakened to essentially breakeven due to lower-than expected enrollment and some non-recurring expenses.

Management projects a modest but positive GAAP operating margin for the fiscal year ending Dec. 31, 2015. The 2016 budget is not yet finalized. Additionally, management indicated that moderate tuition increases of perhaps 1%-2% are being contemplated going forward. This could lead to some margin compression.

ADEQUATE FINANCIAL CUSHION
MCNY's balance sheet improved significantly through fiscal 2013, driven by operating cash flow retention. The college is not historically a large fundraiser. Fitch defines available funds (AF) as cash and investments less permanently restricted net assets. At Dec. 31, 2014, the most recent audit date, AF was $23.2 million, equal to 84% of operating expenses, and 31.8% of bond and loan obligations. Fitch views these ratios as strong for a 'BB' rated private college.

However, MCNY is continuing to make equity contributions (a grand total of about $10 million) toward the Rector Street and Bronx projects. At the end of fiscal 2014, MCNY reported that up to $7.65 million of equity contributions are still projected. When AF is adjusted for remaining equity contributions, it is about $16.25 million, equal to a much slimmer 22% of debt ($73 million) and 59% of operating expenses. The nominal amount is small compared to many other colleges, and MCNY may use unrestricted reserves to pay the $5.585 million loan bullet maturity in 2020.

Fitch believes MCNY's ability to manage refinancing risk is limited, which makes building financial resources over time another factor in maintaining the rating.

HIGH DEBT LEVERAGE
For the fiscal year ending Dec. 31, 2014, current debt service of $4.1 million was largely related to the college's facility leases. This represented a high 15% of operating revenues. Pro forma maximum annual debt service (MADS) is about $4.8 million, excluding the loan bullet maturity discussed previously. This resulted in an even higher high debt burden of about 17%.

The $5.585 million loan from Goldman Sachs, related to the Bronx location, recently closed as a fixed-rate, interest-only obligation due in 2020. At that time the college will either refinance or pay the loan in full. Debt burden, including the bullet maturity, represented an exceptionally high burden of 36% of fiscal 2014 operating revenues.

BOND AND LOAN SECURITY PROVISIONS
The series 2014 bonds have a current debt service coverage covenant of at least 1.1x starting in fiscal 2016, and 1.2x in fiscal 2017 and thereafter. In the event coverage is 1.0x but below covenanted levels, MCNY is required to hire a consultant, thus providing some time to return to covenanted levels.

The college has no other debt plans at this time. Fitch views MCNY as being at its debt capacity.

Management reports that the loan documents for the Bronx facility financing allow for the loan to accelerate for various reasons, including failure to meet any other debt obligation (principally the series 2014 bonds), loss of MCNY's academic accreditation, or failure to meet annual liquidity requirements. MCNY must also demonstrate at its fiscal year end that it has $10 million of net assets, of which $5 million must be liquid. Fitch does not rate the bank loan.

POSITIVE DEBT SERVICE COVERAGE
The financial plan calls for MCNY's bond and loan debt service to replace existing facility lease payments and thus avoid lease escalations expenses. Maintenance of solid debt service coverage is critical given MCNY's slim balance sheet, planned equity contributions, high student fee reliance, and high debt burden.

Current fiscal 2014 debt service coverage, mainly lease expense, was a slim but positive 1.1x. Coverage of pro forma MADS ($4.8 million in 2023) was only 0.94x. However, coverage of the roughly $4.3 million debt service due between 2017 and 2020 would have been about 1.05x. As expected, fiscal 2014 operations did not cover MADS when including 2020 bullet maturity (about $10 million). Overall, slim coverage highlights the importance of growing enrollment, net tuition revenue, and strengthening coverage metrics to retain the current rating.