OREANDA-NEWS. Fitch Ratings has affirmed the 'BB-' rating on approximately $9.5 million 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 Stable.

SECURITY

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

KEY RATING DRIVERS

IMPROVING FINANCIAL OPERATIONS: The rating reflects five years of positive GAAP operating margins.

NET TUITION REVENUE DEPENDANCE: Moderately increased enrollment since fall 2012 has supported net tuition revenue growth, although it remains pressured by scholarship discounts. The college's small size and limited balance sheet heighten its vulnerability to demand shifts and enrollment volatility.

LIMITED BALANCE SHEET: Brevard's fiscal 2015 balance sheet ratios, as calculated by Fitch, remain weak for the rating category.

MANAGEABLE DEBT BURDEN: The college's pro forma maximum annual debt service (MADS) debt burden, including a $6.38 million USDA loan for student housing, is high to moderately high at 7.8% of fiscal 2015 revenues. However, this is somewhat mitigated by solid MADS coverage of 2.4x. For the last six fiscal years, including 2015, MADS coverage of debt service has been positive.

RATING SENSITIVITIES

ENROLLMENT TRENDS: Enrollment declines at Brevard College, combined with failure to grow net tuition revenue and sustain positive operating margins, could result in a negative rating action.

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

LIMITED DEBT CAPACITY: Brevard's debt burden 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. Solid debt service coverage is 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 its students distinctive experiential learning. Brevard is known for its performing arts programs and environmental sciences.

Brevard was founded in 1853 as a two-year institution, and became a four-year college 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 current 10-year accreditation runs through 2021.

ENROLLMENT DRIVES OPERATIONS
Brevard's operating revenues remain heavily reliant on student revenues, typically between 70%-77%, which is similar to many other liberal arts colleges. Enrollment has increased incrementally since fall 2012, resulting in headcount of 729 in fall 2015. Headcount is up 16% since fall 2012. The college continues to focus on modest annual enrollment increases; the current strategic plan has a goal of building to 886 students by fall 2020.

The fall 2015 entering class increased modestly to 294, levels comparable to 288, 308 and 273 in fall 2014, 2013 and 2012, respectively. Management reports that, to date, fall 2016 admissions indicators (applications, deposits, campus visits) are similar to fall 2015.

Management enrollment strategies focus on new-student 'fit' at the college, more experiential learning opportunities, as well as retention initiatives. The college's freshman-to-sophomore retention rate has been improving, but remains weak at about 58% in fall 2015, similar to the previous year.

Fitch views Brevard's ability to achieve growth in both enrollment and net tuition revenue as determining long-term operating success. The rating reflects multi-year progress on enrollment and positive operating performance.

POSITIVE OPERATING PERFORMANCE
GAAP operating results were positive in each of the last five years and support the rating. The fiscal 2015 operating surplus was $1.3 million (7.3% margin), which compared to $2.1 million (12% margin) in 2014 and a Fitch-adjusted $479,000 (0.2%) in 2013. Margins in 2015 were slightly weaker due to discounting pressures causing a 4% decline in net tuition revenue. The college reports that the 2016 budget is balanced, with growth in net tuition revenue.

Management has exercised significant expense controls during the last several years, including salary reductions and freezes, curtailment of retirement matching contributions, and maintaining position vacancies. Since 2014, the college provided only modest salary increases, primarily through a holiday bonus pool, and has not yet begun making employer matches to the defined contribution retirement program. The strategic plan has goals to gradually invest more in faculty and staff salaries, as the budget allows. Brevard continues investing strategically in plant and programs, using gifts, grants and budget allocations.

Controlling the tuition discount is an ongoing challenge given Brevard's highly competitive and cost-conscious market. The discount rate increased to 53% in fiscal 2015, up from a still high but relatively stable 49% in the previous four years. However, GAAP operations remained positive in fiscal 2015, and are expected to be similar in fiscal 2016. To maintain the rating going forward, Fitch expects positive operating margins to be sustained.

WEAK AVAILABLE FUNDS
Brevard's balance sheet is very weak for the rating category, providing limited financial cushion. At May 31, 2015, available funds (AF), defined by Fitch as cash and investments less permanently restricted net assets, was stable at $2.6 million.

Fiscal 2015 AF was only 15.6% of operating expenses and 14.8% of pro forma debt ($17.4 million including the USDA student housing loan). The college has $24.2 million of endowment, almost all of which is restricted and thus is not reflected in the AF calculation. Fiscal 2016 ratios are expected to be similar.

Brevard's AF ratios could increase modestly 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 could improve, it remains slim for the rating category.

DEBT BURDEN 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 84-bed student residence hall. The college started drawing down on the loan in calendar 2015. Fitch estimates pro forma debt at $17.4 million (including some operating leases and a bank working cash line), and pro forma MADS at $1.37 million.

Pro forma MADS was about 7.8% of fiscal 2015 operating revenues, which Fitch considers high-to moderately high. The residence hall 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. The strategic plan focuses on gradually building working cash reserves and reducing seasonal reliance on the bank line.

POSITIVE DEBT SERVICE COVERAGE
Brevard has posted positive debt service coverage for the last six fiscal years, including fiscal 2015. Pro forma MADS coverage was 2.4x in fiscal 2015, which compares to 2.9x in 2014 and 1.9x in fiscal 2013 (2013 is adjusted for a non-cash bequest). Pro forma MADS coverage is expected to again be positive in fiscal 2016.