Fitch Rates Albuquerque Academy (New Mexico) Series 2010 Revs 'AA-'

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings assigns an 'AA-' rating to the following series of bonds issued by Los Ranchos de Albuquerque, New Mexico on behalf of Albuquerque Academy (the academy):

--$36 million educational facilities refunding and improvement revenue bonds, series 2010.

The series 2010 bonds are expected to price via negotiated sale the week of Sept. 6, 2010. Proceeds of the bonds will be used to refinance the academy's outstanding series 2002 and series 1999 bonds, pay an interest rate swap termination fee, finance various campus improvements, and to pay costs of issuance.

In addition, Fitch affirms the ratings on the following series of bonds issued by the City of Albuquerque, New Mexico on behalf of the academy:

--$25.4 million educational facilities variable-rate revenue bonds, series 2002 at 'AA-' (underlying);

--$4.4 million educational facilities refunding revenue bonds, series 1999 at 'AA-'.

The Rating Outlook remains Negative.

RATING RATIONALE:

--The 'AA-' rating primarily reflects the academy's balance sheet liquidity, which is solid, although weakened as a result of the recent turbulence in global financial markets; solid student demand, and modest enrollment growth over the past several years.

--While liquidity metrics remain solid, the academy relies heavily on its balance sheet resources to subsidize school operations, which have become increasingly negative.

--Other concerns include the academy's high pro forma debt burden, and the slowdown in the real estate market, which has curtailed the activities of the academy's for-profit real estate subsidiary (High Desert), the entity largely responsible for the build-up of the academy's financial resources.

--While a decline in liquidity along with an increasingly negative operating margin resulted in the recent assignment of a Negative Rating Outlook, Fitch notes that slightly improved operating performance for fiscal 2010 (unaudited) and effective measures taken by management aimed at stabilizing the academy's financial position for the future may have positive implications for the Rating Outlook over the intermediate term.

WHAT COULD TRIGGER A DOWNGRADE?

--Further diminishment of the financial cushion; preservation of the academy's sizeable endowment remains essential to maintaining the current rating;

--Failure to continue to stabilize operating performance and significantly reduce operating deficits over the intermediate term.

SECURITY:

The bonds are an unsecured general obligation of the academy, payable from all legally available funds.

CREDIT SUMMARY:

The academy's liquidity profile, while materially weaker than in prior years, remains solid and underpins the 'AA-' rating. Fiscal 2009 available funds (unrestricted and temporarily restricted cash and investments) were $62.7 million, down 39% from $102.7 million in fiscal 2008 as a result of investment losses stemming from global financial market turbulence. While available funds covered operating expenses ($39.5 million) and pro forma debt (approximately $50 million) by a solid 159% and 127%, respectively, these liquidity ratios declined from 245% and 208% in fiscal 2008. Furthermore, the academy's asset allocation is fairly aggressive, with approximately 34% of its $54.5 million investment portfolio exposed to limited partnerships as of June 30, 2010. Further diminishment of the academy's balance sheet resources and liquidity may 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, deterioration in the operating margin over the past few years (negative 55% in fiscal 2009), 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 reduced endowment spending in fiscal 2010, offsetting this reduction through a combination of tuition and fee hikes, increased fundraising, and various budgetary restraints, such as a hiring and salary freeze. Without notable improvement in operating performance over the intermediate term, there could be additional negative rating pressure. However, Fitch notes that on an unaudited basis, the academy's operating performance for recently concluded fiscal 2010 shows slight improvement from fiscal 2009.

Typical of independent schools, the academy has limited revenue diversity, with student-generated revenues representing a high 83.5% of unrestricted operating revenues in fiscal 2009. Depending upon the revenue contribution provided by real estate sales (none in fiscal 2009), 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 2010, the academy enrolled 1,100 students, up 3% since fall 2005. Indicative of continued, strong demand for programs, the academy's fall 2010 acceptance rate was a fairly selective 47%, with an impressive 74% of accepted students matriculating.

The academy is an independent college preparatory school that was established 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 High Desert, 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 future development and sale.

Additional information is available at 'www.fitchratings.com'.

Related Research:

'Revenue-Supported Rating Criteria', dated 16 Aug 2010.

'Independent School Rating Criteria', dated 24 Aug 2010.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606

Independent School Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550765

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