Fitch Affirms Brevard College (NC) Revs at 'BB-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'BB-' rating on approximately $8.2 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

POSITIVE FINANCIAL OPERATIONS: The rating and Stable Outlook reflect six consecutive years of positive GAAP operating margins for this small liberal arts college.

NET TUITION REVENUE DEPENDENCE: Even with enrollment volatility, net tuition revenue has generally grown, but remains pressured by scholarship discounts. The college's small size and limited balance sheet make it vulnerable to demand shifts and enrollment volatility.

LIMITED BALANCE SHEET: Brevard's fiscal 2016 balance sheet ratios, as calculated by Fitch, remain very weak compared to peer institutions.

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 7.3% of fiscal 2016 revenues. This is partially mitigated by solid MADS coverage of 2.5x and no new debt plans. For the last seven fiscal years, including 2016, MADS coverage of debt service has been positive.

RATING SENSITIVITIES

ENROLLMENT TRENDS: Sustained enrollment declines at Brevard College, combined with failure to grow net tuition revenue and sustain positive operating margins, would result in a negative rating action. Fall 2017 enrollment is expected to be comparable to prior years.

BALANCE SHEET: Low balance sheet ratios continue to constrain Brevard's rating. Further weakening in the colleges' operating reserves and balance sheet ratios in fiscal 2017 and beyond could trigger 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 limited additional debt capacity at this time.

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 a distinctive experiential learning environment. Brevard is known for its performing arts programs, environmental sciences and relatively new criminal justice program. Management confirmed that the campus had no Hurricane Matthew damage earlier in fall 2016, and that there have been no forest fires in Brevard or Transylvania county.

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. Board leadership and senior management is stable.

ENROLLMENT DRIVES OPERATIONS

Brevard's operating revenues rely heavily on student revenues, typically between 70%-77%, which is similar to many other liberal arts colleges. Enrollment remains somewhat volatile. It increased overall between fall 2011, with fall 2016 headcount of 704 up 12.3% from 627 in fall 2011. However, fall 2016 enrollment was below expectations compared to fall 2015 (729), in part due to a planned change to division III athletics. Retention and recruitment of student athletes (whose scholarship packages changed) was weaker than management expected.

The college continues to focus on modest annual enrollment increases and retention. The fall 2016 freshman-sophomore retention rate was quite weak at 42%. The current strategic plan has a goal of building to 886 students by fall 2020; management reports sufficient academic and auxiliary facilities for the target enrollment.

The fall 2016 entering class was 277 students, lower than 294 in fall 2015, but comparable to 288, 308 and 273 in fall 2014, 2013 and 2012, respectively. Management reports that spring 2017 retention projections are stronger than last year. Fitch will monitor fall 2017 enrollment and demand trends, which may not be comparable to prior years due to the change to division III athletics and related scholarships, and possible application delays due to family disruptions from regional fires and storms (which have not impacted Brevard).

College enrollment strategies focus on new-student 'fit' at the college, communicating Brevard's experiential learning and internship opportunities, as well as retention initiatives. The college's freshman-to-sophomore retention rate remains weak.

Fitch views Brevard's ability to grow both enrollment and net tuition revenue as determining long-term operating success. The rating reflects overall progress on enrollment (which is expected to continue in fall 2017) and positive operating performance.

POSITIVE OPERATING PERFORMANCE

GAAP operating results were positive in each of the last six fiscal years and support the rating. The fiscal 2016 operating surplus was $1.5 million (8.1% margin), which compared to $1.3 million (7.3%) in fiscal 2015, and $2.1 million (12% margin) in 2014. Margins continue to be pressured by discounting. Brevard held the institutional discount rate to 53% in both fiscal 2015 and 2016, and management reports the rate for fiscal 2017 could be slightly more favorable. Even with lower-than expected enrollment, the college has a balanced 2017 operating budget and projects positive GAAP operations.

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 has 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 to invest 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 a high 53% in fiscal 2015, which was maintained in fiscal 2016; GAAP operations remained positive in both years. To maintain the rating going forward, Fitch expects continued positive operating margins at Brevard.

WEAK BALANCE SHEET

Brevard's balance sheet remains very weak for the rating category, providing limited financial cushion. At May 31, 2016, available funds (AF), defined by Fitch as cash and investments less permanently restricted net assets, was $720,000, down from $2.6 million in fiscal 2015, in part due to general market fluctuations. This resulted in very weak AF ratios: 4.1% AF relative to operating expenses and 4.6% relative to pro forma debt ($16.7 million).

Fitch's debt calculation includes the entire USDA student housing loan, which is expected to close later in calendar 2016. The college has $22 million of endowment, almost all of which is restricted and thus is not reflected in the AF calculation.

Positively, the college received an initial payment from an unrestricted bequest at the beginning of fiscal 2017, which was initially recorded as revenue in fiscal 2013. Auditors estimated the cash portion of the bequest to the college at $2.5 million in fiscal 2013. About $1.2 million was received at the beginning of fiscal 2017, and additional amounts are expected. While this should help support fiscal 2017 ratios, Fitch still considers them to be weak.

MANAGEABLE DEBT BURDEN

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 project opened in fall 2016, and management reports it on time and under budget. The USDA loan is expected to close in calendar 2016, at which time the debt service schedule will be finalized. Fitch estimates pro forma MADS at $1.37 million, including the estimated loan amount. Pro forma MADS debt burden was about 7.3% of fiscal 2016 operating revenues, which Fitch considers high-to-moderately high.

Brevard maintains a $1.5 million bank line for operating cash flow. A strategic plan goal is to gradually build working cash reserves and reduce seasonal reliance on the bank line. The line balance at the end of fiscal 2016 was $1.15 million, down from $2.25 million in fiscal 2012.

POSITIVE DEBT SERVICE COVERAGE

Brevard has posted positive debt service coverage for the last seven fiscal years, including fiscal 2016. Pro forma MADS coverage was 2.5x in fiscal 2016, which compares to 2.4x in fiscal 2015 and 2.9x in 2014.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012

U.S. College and University Rating Criteria (pub. 12 May 2014)
https://www.fitchratings.com/site/re/748013

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015689

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015689

Endorsement Policy
https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

Contacts

Fitch Ratings
Primary Analyst:
Susan Carlson, +1-312-368-2092
Director
Fitch, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Committee Chairperson:
Eva Thein, +1-212-908-0674
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Susan Carlson, +1-312-368-2092
Director
Fitch, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Committee Chairperson:
Eva Thein, +1-212-908-0674
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com