Fitch Downgrades McDaniel College, Maryland's Revs to 'BBB+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded $47.6 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.

RATING RATIONALE:

--The downgrade to 'BBB+' from 'A-' reflects McDaniel's materially weakened balance sheet resources, driven largely by recent financial market turbulence, and enrollment volatility.

--The 'BBB+' rating reflects adequate liquidity levels for the rating category and sound debt service coverage.

--Credit concerns include the college's significant reliance on student generated revenues, high debt burden and considerable variable rate exposure.

KEY RATING DRIVERS:

--Preservation of the unrestricted financial cushion at or near current levels.

--Stabilization of enrollment enabling the college to narrow GAAP based operating losses.

SECURITY:

The bonds are a general obligation of the college.

CREDIT SUMMARY:

The financial cushion, historically cited by Fitch as an offset to the college's negative GAAP operating margin (negative operating margin) and revenue concentration in tuition and other student related fees (79.7% of adjusted total operating revenues), has weakened. Balance sheet resources were substantially impacted by investment losses in previous years as well as reclassifications attributable to the Uniform Prudent Management of Institutional Funds Act (UPMIFA). Available funds, defined as cash and investments less permanently restricted net assets, declined 29.6% between fiscal 2007 and 2010, In fiscal 2010, available funds covered total debt ($52.9 million) and operating expenses ($60.2 million) by 74.4% and 84.5%, respectively, which is adequate for the 'BBB+' rating.

Depreciation expense increased 28% between fiscal 2007 and 2010 due to the college's investment in physical plant. McDaniel's largest revenue source, student generated revenues, (79.7% of operating revenues) decreased by a modest 1% over the same period. The combination of these factors led to a negative operating margin in both fiscal 2009 (-1.4%) and fiscal 2010 (-2.6%). While the school successfully held expenditures flat in fiscal 2010 and has a practice of raising tuition and fees annually, revenue flexibility remains limited given the college's rather high tuition discounting rate (40.2% in fiscal 2010) and cost of attendance ($40,340, including room and board).

Enrolment declined over the past few years due to weakness in the economy and the graduation of two particularly large freshmen classes. Full-time equivalent (FTE) enrollment decreased 3% between fall 2007 and fall 2010, including 2.4% in the most recent audited year. Based on interim reports, McDaniel's demand trends appear to be stabilizing in 2011, reversing a three-year decline. The ability to sustain enrollment at or near current levels should enable the college to begin narrowing GAAP based operating losses. While it is not uncommon for private higher education institutions to be heavily tuition-reliant, McDaniel's dependency on student-generated revenue sources is high, emphasizing the college's need to sustain and carefully manage enrollment levels.

The college's debt burden remains above-average, with maximum annual debt service (MADS) representing approximately 6.7% of fiscal 2010 revenues, in line with prior years. McDaniel's variable rate exposure (33% of total outstanding debt) is fairly high for a 'BBB+' rated private college. In 2010, McDaniel converted its letter of credit (LOC) supported series 2000 variable rate demand debt (VRDBs) to bank qualified bonds. These bonds, now held by BB&T Bank with an initial term of seven years, eliminate the immediate renewal risk associated with the then outstanding LOC. However, potential liquidity risks remain.

McDaniel is planning to fund near-term capital projects, including a renovation of its stadium, through grants and cash received from the college's historically strong fund raising efforts; at this point the college has no plan to increase its leverage. To date, the college has raised $7 million out of the $10 million needed for the stadium and received a significant portion of the $77 million in pledges from its last capital campaign.

McDaniel College, located 30 miles west of Baltimore, was founded in 1867 as a private liberal arts college. It changed its name in May 2002 from Western Maryland College. McDaniel is one of 40 colleges featured in a guide published by a former New York Times education editor. The guide inspired a non-profit organization, Colleges that Change Lives (CTCL), which works to attract interest in the schools. The college partners with other CTCL schools in recruitment efforts, including national tours. In addition, the college hosts a summer program for high school students in conjunction the Bill and Melinda Gates Foundation.

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

In addition to the sources of information identified in Revenue-Supported Rating Criteria, this action was additionally informed by information from the college's management team.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June, 20, 2011);

--'College and University Rating Criteria' (Dec. 29, 2009).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493170

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