Fitch Downgrades Riverside Military Academy, GA Rev Rfdg Bonds to 'BB+'; Outlook Stable
Fitch Ratings downgrades the rating on approximately $72 million of Gainesville Redevelopment Authority, GA's revenue refunding bonds issued on behalf of Riverside Military Academy (RMA) to 'BB+' from 'BBB-'.
The Rating Outlook is revised to Stable.
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 DOWNGRADE: The rating downgrade is based on a six-year trend of deeply negative operating deficits and sustained reliance on balance sheet resources, which has substantially depleted unrestricted liquidity. A high debt burden continues to hamper RMA's ability to balance operations.
LONG TERM STRATEGY: The Stable Outlook reflects growth in student headcount from fiscal 2010 through 2012 as a result of the academy's execution of a multi-year business plan that is expected to reduce endowment support and achieve profitability on a cash-flow basis by fiscal 2015.
DIMINISHING LIQUIDITY: Investment losses and continued reliance on balance sheet resources to support operations have eroded unrestricted liquidity by roughly 50% over a five-year operating history. RMA recently adopted a predominantly fixed income based investment allocation that is expected to preserve RMA's endowment going forward.
HIGH DEBT BURDEN: Although reduced by RMA's retirement of a portion of outstanding bonds in fiscal 2011, debt burden remains relatively high at 34%. This high leverage is mitigated by the school's limited future capital needs.
RMA was founded in 1907 as a military-style boys college preparatory school and offers boarding and day school programs for grades 7-12. The academy is situated on a 206-acre campus located in the foothills of the Blue Ridge Mountains, north of Atlanta in Gainesville, Georgia.
OPERATING DEFICITS; LIQUIDITY OFF TARGET
RMA's performance for the last six years has been characterized by deeply negative margins that are expected to continue through the intermediate term. While Fitch acknowledges improvement in operating performance for the past three years, operating margins are not expected to achieve breakeven for another four to five years. RMA has been diligent in executing a board adopted business plan to return to profitability by fiscal 2015. However, RMA's recovery has been impeded by costs incurred to improve the student experience via food service and admission and enrollment related expenditures to expand student headcount.
Balance sheet resources constitute RMA's primary credit strength and have diminished substantially since 2008. Totaling over $82 million as of fiscal 2008, the academy's available funds (AF), consisting of unrestricted cash and investments declined precipitously to $41.5 million as of May 31, 2012. While AF provides strong coverage of operating expenses (213%) and adequate coverage of long-term debt (54.6%), future draws to support operations are anticipated to weaken current liquidity levels.
The academy initially forecast $44.7 million in available funds for fiscal 2012 but was unable to meet the goal due to investment losses. To curb any further investment related dilution, RMA adopted a very conservative investment allocation. The academy currently holds 90% of its investments in fixed income securities and will increase the allocation to 95% by March 2013. The remainder is expected to be held in cash. This change in investment policy is noted favorably. Additionally, Fitch emphasizes the importance for the academy to maintain balance sheet resources at forecasted levels to preserve rating stability.
INCREASED RELIANCE ON ENDOWMENT
Fund raising initiatives, which previously were minimal, have been incorporated into RMA's operating functions and offset some of the growth in expenses. Acknowledging developing revenue sources and sunk costs for future enrollment success, Fitch notes that the ability to curb costs and balance operations through enrollment driven revenue growth is key to sustain RMA's improvements and avert ratings action.
ENROLLMENT GROWTH PROGRESS EVIDENT
The academy has attained a degree of stability with enrollment. Fitch favorably notes RMA enrolled 471 students in school year 2011-2012, an enrollment target forecasted for school year ending 2015. Fall 2012 enrollment (2012-2013 school year) was the highest noted in five years at 424 students, representing 19% year-over-year growth from fall 2011. The academy conservatively expects to end the school year with 480 students.
Retention rates have improved along with enrollment growth. 75% of former RMA students returned in fall 2012, reflecting marked improvement from the previous four-year average (65%) retention rate. In addition to enrollment growth, RMA increased tuition and fees 4% for both 2011-2012 and 2012-2013 after holding tuition stable for 2009 and 2010. The academy still remains affordable relative to other all-boys boarding schools nationwide. Fitch will monitor ending enrollment for fiscal 2013 and fall 2014 to measure success of RMA's admission initiatives. Fitch notes that decline in current enrollment levels can further pressure the rating.
Although RMA has achieved some success from following its business plan, the ability to sustain improvement can be impeded by uncertain future demand and volatility in global financial markets, which could negatively impact RMA's resource base.
HIGH DEBT; MINIMAL NEEDS
The debt burden remains high. Maximum annual debt service consumes 34% of fiscal 2012 unrestricted operating revenues, which is significantly in excess of Fitch investment grade guidelines for independent schools. Debt outstanding totals $72 million and is secured by all revenues of RMA and a fully funded debt service reserve. RMA can draw upon a line of credit secured by its long-term investments; however, the line is currently unutilized and has a zero balance. 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.
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' (June 12, 2012);
--'Independent School Rating Criteria' (June 18, 2012);
--'Fitch Affirms Riverside Military Academy, GA's $76MM Rfdg Revs at 'BBB-'; Outlook Negative' (Nov. 18, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Independent School Rating Criteria
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