Fitch Ratings has downgraded the underlying rating on the following series of bonds issued by the City of Albuquerque, New Mexico on behalf of Albuquerque Academy (the academy) to 'AA-' from 'AA':
--$25.4 million educational facilities variable-rate revenue bonds, series 2002;
--$5 million educational facilities revenue refunding bonds, series 1999.
The Rating Outlook is revised to Negative from Stable.
RATING RATIONALE:
--The downgrade primarily reflects material deterioration of the academy's balance sheet resources, coupled with its substantial reliance on such resources to subsidize operations, which have become increasingly negative.
--While significantly weakened as a result of recent financial market turbulence, liquidity remains solid and is the academy's primary credit strength.
--The academy has also enjoyed stable enrollment over the past several years, with solid student demand and modest enrollment growth.
--Ongoing credit concerns include the academy's high debt burden and the slowdown in the real estate market, which has curtailed the activities of the academy's for-profit real estate subsidiary, the entity largely responsible for the build-up of the academy's financial resources.
WHAT COULD TRIGGER A DOWNGRADE?
--Failure to stabilize operating performance and significantly reduce operating deficits over the near term;
--Further diminishment of the financial cushion.
SECURITY:
The bonds are an unsecured general obligation of the academy.
CREDIT SUMMARY:
The academy's liquidity profile, while materially weaker, remains solid. Fiscal 2009 available funds, defined by Fitch as unrestricted and temporarily restricted cash and investments, were $62.7 million, down 39% from $102.7 million in fiscal 2008, mainly as a result of investment losses stemming from global financial market turbulence. While available funds covered operating expenses ($39.5 million) and debt ($45.9 million) by a solid 1.6 times(x) and 1.5x, respectively, these liquidity ratios declined from 2.5x and 2.8x, respectively, in fiscal 2008, and are now below what Fitch generally expects at the 'AA' rating level. Furthermore, the academy's asset allocation is fairly aggressive, with approximately 32% of the portfolio exposed to limited partnerships as of June 20, 2009. Further diminishment of the academy's balance sheet resources and liquidity is likely to result in negative rating pressure.
The rating continues to reflect the academy's negative operating margins which historically had been offset by its level of balance sheet resources and liquidity. However, recent results show further deterioration in the operating margin (negative 55% in fiscal 2009), which coupled with recent significant declines in available funds, weakens the overall credit profile. The academy is heavily dependent upon the performance of its long-term investments, namely its endowment to help subsidize operations. The academy's endowment spending policy, which is equal to 4%-6% of the three-year moving average of the endowment market value, is typical for independent schools. However, without such payout, the academy is unable to balance its budget.
To maintain its 'AA-' rating, Fitch expects the academy to gradually reduce its reliance upon its balance sheet resources through improved operations. Due to recent declines in endowment valuation, management has indicated an intention to reduce endowment spending in fiscal 2010, offsetting this reduction through a combination of tuition and fee hikes; increased fundraising; and various budgetary restraints, such as hiring and salary freezes. Without notable improvement in operating performance over the near term, additional negative rating pressure may be warranted.
Typical of independent schools, the academy has limited revenue diversity, with student-generated revenues representing 83.5% of unrestricted operating revenues in fiscal 2009. Depending upon the revenue contribution provided by real-estate sales, which is also a significant source of funding, though extremely variable, the academy's reliance upon tuition, fees, and auxiliary revenues may be considerably lower.
Offsetting the revenue concentration in student generated revenues is the academy's track record of stable enrollment and solid demand trends. For fall 2009, the academy enrolled 1,095 students, an increase of 2.5% since fall 2005. Indicative of strong demand for programs, the academy's fall 2009 acceptance rate was a selective 39.6%, with an impressive 80.2% of accepted students matriculating. To date, inquiries and applications for fall 2010 are on par with the previous year.
The academy is an independent college preparatory school. It was founded in 1955 with a donation of land and $1 million. The donor subsequently gave the academy an additional 13,000 acres of undeveloped land, and over the proceeding decades, the academy developed and sold the land to build its endowment. In 1991, the academy formed a for-profit subsidiary, which is consolidated in its financial statements, to develop and sell the remaining land. Subsequent to the formation of the subsidiary, the academy purchased an additional 6,400 acres to be sold to the subsidiary for development and sale.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following report:
--'Revenue-Supported Rating Criteria', (Dec. 29, 2009);
--'Private School Credit Analysis Guidelines', (Jan. 4, 2007).
Additional information is available at 'www.fitchratings.com'.
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Contacts:
Fitch Ratings, New York
Colin Walsh, 212-908-0767
Douglas J.
Kilcommons, 212-908-0740
or
Media Relations:
Cindy
Stoller, 212-908-0526
Email: cindy.stoller@fitchratings.com
