COLLEGE HAS $6.2 MILLION OF RATED DEBT OUTSTANDING
California Educational Facilities Authority
NEW YORK, Jun 9, 2011 -- Moody's Investors Service has affirmed the Baa3 issuer rating of Otis College of
Art and Design (Otis or the College). The outlook is stable.
The College is a participant in the 1999B Pooled College and University Project
Revenue Bonds, rated Baa3 with a stable outlook, issued through the California
Educational Facilities Authority. Although Otis is a member of the pooled
financings, the rating and outlook is based on the relative share of each
participant in the pool, bond maturities, the participants underlying credit
quality and the corresponding expected loss (default frequency times loss
severity) for their rating categories. For more information on this pool, please
see our report dated February 20, 2009.
SUMMARY RATINGS RATIONALE: The Baa3 rating and stable outlook incorporates our
expectation that Otis will maintain its stable market position, which has
resulted in the growth in the net tuition revenue, and positive operating
performance. Offsetting these factors are the College's increasingly challenging
marketplace, limited financial resources and potential future debt plans.
*Solid market position as a private art and design college enrolling 1,206
full-time equivalent (FTE) students (95% undergraduate enrollment) in
Westchester, California. The College has experienced 9% growth FTE enrollment
from Fall 2006 to Fall 2010;
*Positive operating performance points to prudent fiscal management and
conservative budgeting. Otis' has produced a three-year average operating margin
of 4.7% for fiscal year (FY) 2008-2010, providing average debt service coverage
of 5.2 times;
*Net tuition per student of $25,285 in FY 2010 compares favorably to the
preliminary FY 2010 median of $17,489 for similarly-rated private institutions.
Otis has continually produced annual increases in net tuition per student
despite the recent economic downturn.
*Increasingly competitive marketplace with additional pressure from California's
lower-cost public university systems as well as the other private art and design
schools located in California. Otis' matriculation rate of incoming freshmen has
declined steadily to 20.6% in Fall 2010, down from the 41% in 2003;
*University relies heavily on revenue from tuition and fees (86.7% of the
University's revenue base) so continued growth of net tuition revenue is a
critical credit factor; stressing the importance of continued successful
recruitment and retention of students as demand and market position continued to
*The College's financial resource base remains relatively small at $25.2 million
at the end of FY2010 compared to a the preliminary FY 2010 median of $33.2
million for similarly-rated private institutions. Historically modest
fundraising challenges the institution's resource base and ability to finance
capital improvements without increasing debt.
DETAILED CREDIT DISCUSSION:
LEGAL SECURITY: Otis College's portion of the 1999B Pooled Revenue bonds are a
general obligation of the College and are further secured by a mortgage on the
institution's real property (buildings and parcels).
INTEREST RATE DERIVATIVES: None, 100% fixed rate debt
Otis is planning to grow enrollment incrementally over several years to reach a
potential 1,400 students. The College recently hired a consultant to review its
market position, pricing and discount plans in order to increase its freshman
yield and student quality over the long term. As a result of the initial review,
the College embarked upon a trial of a new discount strategy for the fall 2011
class focusing on increasing discount for targeted segments of the
applicant pool. The College therefore expects to see an increase in its
discount rate to approximately 23% for the fall 2011 class. The
Colleges' budgeted 7% tuition increase for fall 2011 will likely allow Otis to
comfortably absorb the increase in discount rate over the near-term. However
strong growth of tuition rates in the current environment could also negatively
impact matriculation of accepted students. Otis' dependence on student charges
(86.7% of revenue base) puts pressure on the school to continue to grow net
tuition revenue and will require careful balancing of tuition growth and
discounting going forward. The School is projecting flat to modest enrollment
growth for the fall 2011 class.
In order to keep pace with growing enrollment and future growth plans, the
College has formed an expansion plan. Otis has entered negotiations with Los
Angeles International Airport for an 8-acre piece of land on which it would
consolidate its four separate leased locations throughout Los Angeles in the
next 3 to 4 years. Total potential cost is as yet unknown. In the interim, the
College is looking to purchase a 100,000 square foot building in which to expand
studio space and move the executive offices whose lease ends in 2012.
Estimated cost for a new building would be approximately $9.5 million, half of
which would be funded through cash and half through debt. Funds saved from
canceled leases will be dedicated to pay debt service. The College is in the
process of building its cash balance out of unspent contingencies in
anticipation of the building purchase and is planning a $40M capital campaign of
which $20 million would be dedicated to building/expansion plans, $10 million to
the endowment and $10 million to scholarships. However, Moody's notes that even
a modest issuance of additional debt would have a substantial impact on leverage
levels and a possible impact on the credit rating and/or outlook of the College.
The College is in the process of transferring its investments to
Hirtle Callaghan & Co from the Commonfund. As of March 31, 2011, the College
had a total endowment of $13.2 million dollars, with $1.3 designated toward
plans for a new building. The funds are currently allocated with 29.% in cash
and cash equivalents, 34.9% in fixed income, and 35.9% in equity. Management
reports that the Finance Committee of the Board is currently reviewing the asset
allocation policy and plans to make changes once the full transfer to Hirtle
Callaghan is complete. The College has a conservative endowment spending
policy of just 4% of a three-year average.
The stable outlook reflects Moody's expectation of stable financial
resources, generally stable enrollment, continued growth in net tuition
revenue and that sound management practices will continue to allow for
healthy operating performance and debt service coverage. Moody's believes that
Otis' relatively thin financial resources provide limited debt capacity at the
current rating level.
What could make the rating go UP
Increased market demand; growth of financial resources through
fundraising activities with limited additional debt needed to finance capital
What could make the rating go DOWN
Borrowing without commensurate growth of financial resources or
incremental revenues to cover debt service; decline in enrollment and minimal to
no growth in tuition revenues; persistent operating deficits.
KEY INDICATORS (Fall 2010 enrollment data and FY 2010 audited financial data):
Total Full-Time Equivalent (FTE) Students: 1,206 FTE
Freshmen Selectivity: 50%
Freshmen Matriculation: 20.6%
Debt: $6.2 million
Total Financial Resources: $25 million
Total Cash and Investments: $34 million
Three-Year Average Operating Margin: 4.7%
Three-Year Average Debt Service Coverage: 5.24 times
Reliance on Student Charges (as a% of operating revenue): 86.7%
Monthly Liquidity: $23.3 million
Monthly Days Cash on Hand (unrestricted funds available within 1 month divided
by operating expenses excluding depreciation, divided by 365 days): 262
Expendable Resources to Debt: 2.6 times
Expendable Resources to Operations: 0.51 times
California Educational Facilities Authority Series 1999B Pooled College and
University Project Revenue Bonds: Baa3/Stable
College: Chris Alford, Vice President Administration and Finance, 310-665-6940;
Carlene Feichter, Controller, 310-846-5722
The principal methodology used in this rating was Moody's Rating Approach for
Private Colleges and Universities published in September 2002.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, public information, and confidential and proprietary
Moody's Investors Service information.
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of maintaining a credit rating.
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MOODY'S AFFIRMS Baa3 ISSUER RATING FOR OTIS COLLEGE OF ART AND DESIGN (CA); OUTLOOK IS STABLE
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