[July 09, 2014]

Fitch Affirms Maryland Institute College of Art's Revs at 'BBB+'; Outlook Stable

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.

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 seventh consecutive positive margin in fiscal 2013. The strong surplus for fiscal 2013 coupled with gifts and market-driven gains drive growth in balance sheet resources, but resource levels remain only adequate for the 'BBB' category.

ENROLLMENT FLATTENING: MICA realized a dip in undergraduate enrollment in fall 2013 due to rising concerns regarding affordability. A smaller than expected freshmen class was offset, however, by growth in transfer student deposits. Total enrollment is expected to be up in fall 2014 due to growth in freshmen student deposits, which are ahead of budget.

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 MICA 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 change.

BALANCE SHEET PRESERVATION: A material shift in liquid resources relative to MICA'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 2013 headcount enrollment totaled 2,273 students, with estimates at 2,331 for fall 2014.

CAPABLE MANAGEMENT TEAM; NEW LEADERSHIP

As anticipated, MICA's president retired after 36 years in June 2014. MICA's new president, Samuel Hoi, was the former president of Otis College of Art and Design in Los Angeles (a position held for 14 years). MICA's senior management team has extensive experience which is providing continuity during the president's transition. The consistency and stability of management and the board and their collective experience provide confidence in MICA's ability to execute long-range goals.

The new president will be expected to carry out the final two years of MICA's long-standing capital campaign. Management believes MICA is on track to reaching its $100 million goal by 2016. MICA has an established fund-raising culture and the former president was able to solicit strong donor support effectively. Fitch will continue to monitor MICA's fundraising progress which could facilitate modestly improved revenue diversity and drive endowment growth.

MICA's approximately 300 adjunct faculty voted to unionize in April 2014, due to concerns over job security and insufficient wages, creating the first union representing part-time faculty members at any four-year college in the state. Negotiations have not yet started. While it is too early to assess any financial impact, management expects compensation costs may grow out of the negotiations but not in fiscal 2015. Fitch will continueto monitor the overall impact of the unionization on the university.

STRONG OPERATING PERFORMANCE

MICA's audited fiscal 2013 (May 31 year-end) results reflect another year of strong surpluses. MICA's 5.9% operating margin in fiscal 2013, inclusive of the endowment distribution, is in line with fiscal 2012, although MICA realized slower growth (4.7%) in net tuition revenues in fiscal 2013. This followed robust growth of 16.2% in fiscal 2012. Strong results in fiscal 2013 are largely due to MICA's cost-containment efforts. Regular tuition and fee increases, stable tuition discounting, and enrollment growth in fall 2012 are also key drivers of MICA's recent financial results. MICA's fiscal 2013 operating margin is strong for the rating category.

HIGH TUITION DEPENDENCE

Student-generated revenues are by far the dominant revenue source for MICA, and many other private colleges and universities, accounting for a high 90% of the college's unrestricted operating revenues. The weakened economy has led to concerns related to affordability for prospective students and competition from lower priced alternative public institutions. The college's fall 2014 tuition and total cost of attendance remains in the high end of its primary peer group of private arts and design colleges. As a result, management has lowered its annual tuition growth rate to 3.7% for fall 2014 after several years at 5%.

Additionally, management budgets for enrollment conservatively and closely monitors tuition discounting, keeping it relatively stable throughout the recession while growing net tuition revenues, which is viewed favorably by Fitch. Endowment growth and successful fundraising could facilitate modestly improved revenue diversity for MICA, but Fitch expects student-generated revenues to remain the primary driver of operations for the foreseeable future.

CONSERVATIVE ENROLLMENT BUDGETING

Conservative budgeting has allowed the college to weather a smaller freshmen class in fall 2013. Undergraduate full-time equivalent enrollment (FTE) dipped 2.7% in fall 2013, after flat growth in fall 2012, while MICA continued to grow graduate FTEs at 11% in fiscal 2013. MICA has added nine graduate programs in a three to four-year period, as well as two graduate on-line programs offering an MPS in the business arts and design, allowing it to achieve targeted graduate enrollment.

In fall 2013, freshmen enrollment was modestly below projections at 400 students (versus the flat growth or 415 students forecasted). Positively, transfer student deposits were higher than projected in fall 2013, offsetting the shortfall, and MICA exceeded its budgeted target, driving stable operations for fiscal 2014. Fall 2013 total enrollment was conservatively budgeted at approximately 90 students below fall 2012 levels, but was ultimately only 15 students below fall 2012.

Forecasts for fall 2014 reflect modest growth in undergraduate headcount enrollment due to a larger than expected freshmen class based on deposits to date. MICA expects growth in graduate programs to slow with modest growth in undergraduate enrollment in future years. MICA's track record of conservative enrollment budgeting is viewed as a credit strength. The ability to maintain a stable financial profile, irrespective of any material decline in enrollment, will be critical to the rating.

ADEQUATE LIQUID RESOURCES

The college's balance sheet resources improved in fiscal 2013 due to strong operating surpluses and market-driven gains, after investment losses in fiscal 2012 reduced the college's available funds (cash and investments that are not permanently restricted). Available funds grew to $49.1 million in fiscal 2013 from $38.8 million in the prior year, which provides adequate coverage of 66.7% of operating expenses but is thin at 45.3% of pro forma debt. 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, as pro forma maximum annual debt service consumes a high 9.3% of projected fiscal 2013 revenues, compared to 9.8% in fiscal 2012. Sound coverage of 2x from operations partially mitigates this concern. 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 will require that both freshmen and sophomore classes reside on campus. The new living requirement is expected to achieve full occupancy levels.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

'U.S. College and University Rating Criteria', May 2014;

Fitch Affirms Maryland Institute College of Art's Revs at 'BBB+'; Outlook Stable', Aug. 16, 2013.

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=838802

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