NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A+' rating on approximately $36 million of currently outstanding series 2010 revenue bonds issued by Los Ranchos de Albuquerque, New Mexico on behalf of Albuquerque Academy (the academy).
The Rating Outlook is Stable.
The bonds are an unsecured general obligation of the academy, payable from all legally available funds.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'A+' rating reflects the academy's stable student demand and an adequate balance sheet cushion which continues to grow given reduced reliance on endowment spending to fund operations. Counterbalancing the aforementioned factors are fairly limited revenue flexibility due to high dependence on tuition revenues and investment income, a moderately high debt burden, inactivity in real-estate sales due to the slowdown in the real estate market and litigation related to High Desert Investment Corp. (High Desert), a for-profit real-estate subsidiary.
ADEQUATE FINANCIAL CUSHION: Balance sheet resources grew modestly in fiscal 2012 and remain adequate for the 'A' rating category providing solid coverage of operations and debt.
IMPROVED OPERATIONS: Operating performance, while still highly dependent on endowment spending to balance operations, improved in fiscal 2012 as a result of effective measures taken by management to stabilize the academy's financial position.
STABLE DEMAND: Stable student demand, evidenced by modest enrollment growth over the past several years and fairly selective admissions criteria with solid matriculation rates, further underpin the 'A+' rating.
BALANCE SHEET PRESERVATION: Central to the current rating and outlook are Fitch's expectation that the academy will preserve its financial cushion, while sustaining recent improvements in operating performance.
ENROLLMENT STABILITY: Any material change in enrollment could impact the rating, given the academy's fairly limited revenue raising flexibility and its high dependence on tuition revenues for operations.
The academy, founded in 1955, is an independent, co-educational college preparatory day school for grades 6 through 12. It is located in northeast Albuquerque on a 312-acre campus. The academy is governed by a board of trustees which is charged with the responsibility of setting the operating policies of the school. The responsibility for the day-to-day management of the academy and its related entities is delegated to the head of the school and the treasurer, who both report to the board. The academy enrolled 1,129 students in fall 2012 compared to 1,122 students in fall 2011.
The academy's liquidity profile, its primary credit strength, continues to improve but is substantially weaker than just a few years ago. Available funds, defined by Fitch as cash and investments not permanently restricted, totaled $65.5 million as of June 30, 2012, down from $102.7 million as of June 30, 2008. Available funds covered operating expenses and pro forma debt by 169.2% and 138.6%, respectively, in fiscal 2012. While still sound, these metrics are substantially below the fiscal 2008 levels of 245% and 279.5%, respectively. The academy's asset allocation is moderately aggressive, with about 18.4% of its $81.7 million investment portfolio exposed to limited partnership and private equity investments as of April 30, 2012 versus 24.3% in 2010. Fitch views the academy's current liquidity ratios as consistent with the 'A' rating category and expects it should continue to improve given the decreased reliance on endowment spending to fund operations.
To balance operations, the academy historically relied heavily upon the performance of its long-term investments, namely its endowment, to help subsidize operations. The endowment distribution for fiscal 2012 was $6.6 million, steadily declining from $9.1 million in fiscal 2011. Including endowment spending, the academy's fiscal 2012 operating margin improved to roughly break-even at positive 0.7%, following an 8.6% deficit in the prior year. Improvement in fiscal 2012 was the result of various cost containment measures including reduced staff headcount and salary freezes, as well as growth in investment income. Higher tuition and fees and stable demand also contributed to the bottom line, as well as incurring zero subsidiary expenses due to the divestment of High Desert.
Recognizing its increasing reliance on its endowment for operations, the academy began reducing its endowment distribution after reaching its highest level ($13.6 million) in fiscal 2009 and intended to continue gradually reducing it to a more sustainable level. The academy's endowment spending historically included the academy's land holdings which resulted in a high payout. As the payout was drawn from its marketable investment portfolio, this resulted in a steady decline in available funds and liquidity metrics in prior years. The endowment distribution for operations in fiscal 2013 is expected to be closer to $6 million, with $5.8 million (or about 6% of the endowment) budgeted for fiscal 2014. This is within the academy's current spending policy of between 4 - 6%. The academy's ability to continue reducing endowment spending while sustaining recent operating improvements is assumed in the 'A+' rating and stable outlook.
LIMITED REVENUE DIVERSITY
Typical of independent schools, the academy has limited revenue diversity, with student-generated revenues representing 65% of unrestricted operating revenues in fiscal 2012, which is trending upward from prior years. This is due to the decline in investment income (including endowment spending) over prior years, which still contributes a significant 27.9% in fiscal 2012. The revenue contribution provided by real estate sales in prior years was a significant source of funding, though extremely variable. Real estate sales decreased from $2.2 million in fiscal 2010, with no activity during fiscal 2011 and 2012.
Offsetting the academy's concentration in student-generated revenues is its track record of stable enrollment and solid retention rates. For fall 2012, the academy enrolled 1,129 students, up 3.3% since fall 2008. A slightly lower headcount (1,108) is expected in fall 2013 due to a smaller senior class. The academy does not intend, nor does it have capacity, to grow enrollment too much past current levels. To account for large the graduating classes, the focus is largely on recruiting for grade 6 because there is a small attrition of students once they enroll. For the last two years, the overall retention rate has exceeded 97%.
Indicative of continued, strong demand for programs, acceptance rates have been fairly selective (averaging 44% over the past 6 years). However, fluctuations in the number of applicants and increasing financial aid needs caused the academy to adjust its enrollment strategy to become less selective (47.3% for fall 2012). In recognition of its limited budget for financial aid, management decided to accept a higher number of students than in years past knowing that some families would not be able to enroll their child without financial aid assistance. Consequently, the acceptance rate increased and yield remained fairly stable in fall 2012. A lower number of applications in fall 2013 account for a lower, but strong, matriculation rate of 69.2% in fall 2013. Overall, the academy has been successful in reducing its financial aid requirement to $4.6m in fiscal 2013, compared to $5.1m in fiscal 2012. With the current senior and junior classes largely supported by financial aid, it is expected that graduating these classes will greatly impact the academy's resources freeing up financial aid for new students. Furthermore, the academy imposed a budget which limits the number of financial aid recipients admitted requiring it to be more disciplined when looking at new 6th grade candidates. This should help reduce the academy's future financial aid burden.
Fitch views positively that the academy has continued to grow net tuition revenues despite increasing financial aid needs. However, Fitch recognizes that while the academy has gradually increased tuition rates, which has helped augment revenues, tuition rate increases are lower than historical levels to maintain affordability. The academy has limited capacity to grow enrollment from current levels, thus limiting revenue raising flexibility.
MODERATELY HIGH DEBT BURDEN
The academy's maximum annual debt service (MADS) burden is moderately high, which was always cited as a concern. MADS of $3m represent 7.7% of FY12 operating revenues, inclusive of the endowment payout. Included in MADS is a $4m restructured bank note between High Desert and Bank of the West. The Academy is a co-signor on the loan (secured by assets of the Academy). Fitch views positively the Academy's lack of additional debt plans and its entirely fixed-rate debt portfolio, which should keep its debt burden moderate.
HIGH DESERT IMPAIRMENT AND PENDING LITIGATION
High Desert was formed by the academy's board in 1991 for the purpose of acquiring and developing property owned by the academy. It does not operate in the name of, or for the account of, the academy, bind the academy by its actions, or act as the agent for the academy. A change from prior years, the academy's fiscal 2012 special purpose financials prepared by KPMG do not consolidate the academy's investment in High Desert which is required in conformity with GAAP accounting. The investment instead is reported under the equity method of accounting due to the fact that High Desert ceased operations and the academy does not expect to realize any economic benefit from or have any obligation to High Desert. The academy's equity investment in High Desert had a $19.4 million carrying value which was fully impaired in fiscal 2012, and a total loss of $23.4 million was recognized.
In fiscal 2013, a lawsuit was filed against High Desert and the academy, as well as the City of Rio Rancho (Fitch rated 'AA'/Stable Outlook) by a group of 26 plaintiffs who purchased real estate within the East Mariposa Public Improvement District (PID). After High Desert announced it was pulling out of the PID, it failed to comply with its required debt service reserve fund replenishment payment with respect to its agreement under the PID's $16 million series 2006 general obligation bonds (PID Bonds). As a result, property owners were left facing a potential property tax increase as the PID is required under the Indenture to levy an unlimited ad valorem tax at a rate sufficient to pay debt service on the bonds for the fiscal year, and to replenish the reserve to the reserve requirement. The plaintiff's also alleged that High Desert is the alter ego of the academy. The academy's has not recorded any losses related to the lawsuit and believes the claim is without merit which is supported by a legal opinion indicating that creditors of High Desert could not successfully reach the assets of the Academy in order to satisfy such creditor's claims.
According to management, there was a public meeting in late July 2013 affirming the plan to restructure the PID bonds, and the PID board recently accepted the plan. It is expected that all necessary parties will have signed off on the plan by no later than the end of August, before the next tax roll. This restructuring agreement would prevent uncontrollable tax increases in the PID.
Fitch views the lawsuit filed against the academy as a credit weakness as it presents a potential liability for the academy but is mitigated by the academy's comprehensive insurance policy. According to management, the risk is insured under a legal liability insurance policy with policy limits of $25 million for each claim, subject to certain limitations and exclusions, which is expected to adequately cover any damage claims towards the academy. While a settlement is likely, there is no assurance of the outcome until the restructuring plan is finalized. Fitch will continue to monitor the lawsuit and its impact, if any, on the academy as it evolves.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 10, 2013); and
--'Fitch Downgrades Albuquerque Academy's (New Mexico) Revs to 'A+'; Outlook Stable' (Aug. 24, 2011).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria