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.
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
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.
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
BALANCE SHEET PRESERVATION: A material shift in liquid resources
relative to MICA's large debt load could negatively impact the rating.
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
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
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
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
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
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
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.
U.S. College and University Rating Criteria
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