Fitch Ratings has affirmed the 'BBB-' rating on approximately $76 million of outstanding Gainesville Redevelopment Authority, Georgia revenue refunding bonds issued on behalf of Riverside Military Academy (RMA, or the academy).
The Rating Outlook remains Negative.
SECURITY
The bonds are an absolute and unconditional obligation of RMA, secured by a fully funded debt service reserve and a first lien on the academy's campus.
KEY RATING DRIVERS
RATING AFFIRMED: Management's recent ability to reduce operating losses while maintaining an adequate, though somewhat weakened level of balance sheet resources and improving demand profile, underpin the 'BBB-' rating.
LONG TERM STRATEGY ADOPTED: Following three years of significant enrollment declines, student headcount grew in fiscal years 2010 and 2011. Growth is the result of a recently adopted multi-year business plan designed to increase student related revenues, reduce reliance on endowment support and produce breakeven operating margins by fiscal 2015.
HIGH DEBT BURDEN: Over a third of the academy's unrestricted operating revenues are required for debt service, though the school's future capital needs are limited and plant and facilities are relatively new.
WHAT COULD TRIGGER A RATING ACTION
FAILURE TO SUSTAIN OPERATING IMPROVEMENT: A continued trend of decreasing operating losses through enrollment stabilization and prudent budgetary management is critical to maintenance of the rating.
DECLINE IN LIQUIDITY: Any further erosion in balance sheet resources or issuance of additional debt without a commensurate increase in resources sufficient for its repayment will yield negative rating pressure.
CREDIT PROFILE
RMA has demonstrated improvement in operating performance in the past fiscal year, though the margin remains deeply negative. Improvement between from fiscal 2010 and 2011 was a result of enrollment growth, continued expense reductions, and an endowment distribution above RMA's stated policy (5% of the trailing three-year average market value). RMA has been diligent in executing a board adopted business plan to return to profitability by fiscal 2015. The plan includes more fund raising, active enrollment management, with the goal of stabilizing headcount at approximately 475 students at year end and enhanced financial aid. Headcount increased to 450 students in fiscal 2010 from 402 the previous year, and while the fall 2011 student count is lower at 359, this figure does not include enrollments that are expected for the spring of 2012. In addition to engaging a full time admissions consultant, RMA increased need-based financial aid. Following three years of no tuition increases, RMA will raise tuition for the 2011-2012 academic year. RMA will need to manage enrollment growth and retention closely to achieve the goals set forth in its board adopted business plan.
The combination of the aforementioned efforts is expected to further improve RMA's operating profile. However, the school's ability to sustain such improvement could be complicated by an uncertain pipeline of future demand for the school or volatility in global financial markets, which would negatively impact RMA's resource base.
Adequate balance sheet liquidity remains RMA's primary credit strength. Available funds, consisting of unrestricted and temporarily restricted cash and investments, totaled $48.8 million as of May 31, 2011. While available funds are still well below historical levels, they provide strong coverage of operating expenses (261%) and adequate coverage of long-term debt (64%). RMA maintains a line of credit in the amount of $2.6 million secured by its long-term investments. RMA's investment portfolio posted positive returns in fiscal years 2010 and 2011, following significant, market-driven losses in fiscal 2009. Given RMA's track record of operating deficits, maintenance of balance sheet resources at or near current levels is critical to maintaining an investment grade rating.
RMA was founded in 1907 as a military-style boys college preparatory school in Gainesville, GA. The academy's facilities were updated between 1994 and 2004 and are fairly new. RMA does not have significant capital needs and does not anticipate additional debt issuance. The current debt burden is very high, with maximum annual debt service (MADS) consuming 37.4% of fiscal 2011 unrestricted operating revenues.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (Aug. 10, 2011);
--'Independent School Rating Criteria' (June 20, 2011);
--'Fitch Affirms Riverside Military Academy, GA's $81.7MM Rfdg Revs at 'BBB-'; Outlook Negative' (Nov. 22, 2010).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Independent School Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648051
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