The Savannah College of Art and Design in Georgia is coming to market with a deal this week that will dramatically expand its student housing, coming hard on the heels of two credit ratings upgrades.
Earlier this month, Moody's Investors Service raised
Fitch Ratings upgraded the issuer default rating this month on SCAD to AA-minus from A-plus along with the revenue bond rating on the college’s Series 2014 bonds and assigned an AA-minus rating to the Series 2021 issue. The rating carries a stable outlook.
Proceeds from the sale will be used to fund the construction of Chatham Apartments in Savannah and the Spring Street and the Indian Street Development in Atlanta. The college has 15,704 students enrolled in its programs this Fall. It offers online courses and also has a campus for overseas studies in Lacoste, France.
About 650 beds will be added in Savannah. At Spring Street in Atlanta, 581 beds will added during Phase 1 and 402 beds in Phase 2, according to the preliminary official statement; Phase 1 is expected to be completed in the Fall of 2022 and Phase 2 in the Fall of 2023. The Indian Street Development will total 818 beds by the Fall of 2023. Parking and dining facilities along with other amenities at the Atlanta and Savannah campuses will also be upgraded.
“Given current demographic trends, we suspect muni investors will want to dig deeper on a school borrowing to add nearly 2,500 new dorm rooms,” John P. Ceffalio, senior municipal research analyst at CreditSights, said in a report issued Friday.
Investors, he said, will be pleasantly surprised. “They will find that Savannah College of Arts and Design is a virtual cash machine, growing quickly and banking surpluses," Ceffalio said. "We expect strong in-state and national demand for the bonds and believe they would make a good long-term, high-quality, higher education holding.”
Moody's said its ratings upgrade “reflects continued strong financial performance producing robust surpluses sufficient to build reserves, enhancing wealth as well as providing funds to undertake sizeable capital expenditures.”
“Despite coronavirus-related revenue losses in fiscal 2021, the EBIDA [earnings before interest, depreciation and amortization] margin remained robust as adjustments were made to lower expenses, demonstrating good fiscal management and flexibility," Moody's said. "A recently established succession plan for the long-serving president as well as the introduction of new board members also supports long-term credit quality prospects.”
Paula Wallace is the president of SCAD, which is an accredited nonprofit degree-granting university founded in 1978. Prior to being named president, she served as SCAD provost, vice president and academic dean.
At the end of fiscal 2021, the college had about $160 million in Series 2014 debt outstanding. The 2014 bonds will be defeased ahead of the sale.
Fitch said its upgrade reflected the “expectation of continued robust cash flow margins, contributing to further balance sheet strengthening, driven by a resilient enrollment base through the pandemic. SCAD maintains strong financial flexibility even with the new debt issuance, due largely to its growing liquidity and capacity to absorb its capital needs.”
However, the rating agency noted the college relies on student fee revenues and is operating in the heavily competitive sector of art and design.
“In particular, SCAD's limited selectivity and relatively thin matriculation levels limit its flexibility in the face of any prolonged pressure or material volatility in student demand,” Fitch said.
“The stable outlook reflects the flexibility provided by SCAD's robust financial profile against any short-term operating fluctuations. Its ability to exercise significant cost controls (furloughs, cost-plus vendor contracts, travel reductions) in response to shifts in enrollment or programming provides cost flexibility through the forward look,” Fitch said.
SCAD has 6,200 residence units on the two campuses. So far this Fall, 97% of Savannah's 5,120 beds in are used as are 80% of its 1,070 beds in Atlanta, CreditSights said. SCAD's board has approved a requirement for freshman to live on campus next Fall and expects 97% total occupancy when the new dorms are complete.
“We consider the addition of 2,500 dorm rooms aggressive, but well-supported by recent growth trends,” Ceffalio wrote. “If the dorms didn't immediately fill to expectation, SCAD could extend the on-campus requirement to sophomores.”
Goldman Sachs & Co. is set to price the tax-exempt bonds on Wednesday. Siebert Williams Shank & Co. is co-manager on the deal with Kutak Rock LLP acting as bond counsel.
The issue is tentatively structured to mature on April 1 from 2022 to 2044 with an additional term bond to be added.
“Given recent market weakness, the bonds could come at a bargain price at +30 [basis points] or wider, which would heighten their appeal,” Ceffalio wrote.
The spread between the 10-year Bloomberg BVAL AA-minus education benchmark and triple-A yields closed last Thursday at +21 basis points, he said.
“Given the overall weakness in the market and the perceived weakness among higher education issuers, these bonds may get priced wider than that. With the strength of the school's finances, if the new bonds are priced around +30 (or wider) in 10-years, we would expect them to outperform the sector,” he wrote.
SCAD offers undergraduate and graduate programs. Its largest areas of study are animation, film and television, illustration, graphic design and interior design.
Ceffalio said art and design schools, such as the Rhode Island School of Design and the Ringling College of Art and Design in Florida, have prospered, thanks to strong employment markets in these fields.
And SCAD is no different, he said.
“As a solid credit with strong financial and enrollment trends, SCAD bonds stand out in a sector that has many issuers struggling to contend with difficult demographics," Ceffalio wrote. “We anticipate good retail demand from in-state buyers and from institutional investors seeking good ‘buy and hold’ higher ed names."
