NEW YORK--(BUSINESS WIRE)--Fitch affirms the 'BB+' rating on approximately $71 million of Gainesville Redevelopment Authority's series 2007 revenue refunding bonds issued on behalf of Riverside Military Academy (RMA, or the academy).
The Rating Outlook is Stable.
SECURITY
The bonds are an absolute and unconditional obligation of RMA, further secured by a fully funded debt service reserve and a first lien on the academy's campus.
KEY RATING DRIVERS
RATING AFFIRMED: The rating reflects RMA's unrestricted liquidity which is materially depleted by providing support to the academy's consistently negative operations. While fiscal 2013 operations showed improvement, a high debt burden and systemic mismatch of revenue and expenses continue to hamper RMA's ability to balance operations.
OPERATING RESULTS REMAIN NEGATIVE: The academy's fiscal 2013 operations outpaced the business plan due to enrollment growth but margins remain deeply negative.
LIQUIDITY UNDER PRESSURE: The academy's decline in available funds due to investment losses in fiscal 2012 contribute to a weakened liquidity position which faces further dilution as it funds operating shortfalls in future years.
HIGH DEBT BURDEN: Maximum annual debt service (MADS) is very high and constitutes a debt burden of 32.6%, though this is slightly offset by lack of additional debt plans.
RATING SENSITIVITIES
ENROLLMENT GROWTH: The ability of RMA to generate and sustain enrollment gains is imperative to achieve cash basis breakeven operations inclusive of the endowment draw.
LIQUIDITY DECLINE: Continued use of endowment resources without growing income support from operations will pressure liquidity beyond forecasted levels and could negatively influence the rating.
CREDIT PROFILE
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 RESULTS IMPROVE YET REMAIN DEEPLY NEGATIVE
RMA's operating performance, characterized by negative margins, is expected to continue at a loss through the intermediate term. While fiscal 2013 results were better than forecasted, RMA has to consistently rely on a declining endowment fund to service annual debt. While RMA has been diligent in executing a board adopted business plan to return to profitability, GAAP based positive margins are unlikely until post fiscal 2017. As RMA does not include depreciation in assessing the return to breakeven, Fitch expects the academy to need additional years of improved operations post 2017 to generate a GAAP positive margin. RMA's recovery to positive margins are also hampered by increased costs related to student recruitment and marketing, however Fitch considers these expenditures necessary as they were followed by enrollment growth in excess of forecasted levels in fall 2012-2013.
LIQUIDITY CONCERNS
RMA's primary credit strength, its liquid resources, consisting of unrestricted cash and investments totaled $37.9 million as of fiscal 2013. These levels have diminished substantially from nearly $82 million in 2008. The academy's available funds (AF) provide healthy coverage of operating expenses (183%), and modest coverage of long-term debt (52.1%). While annual endowment draws were planned and incorporated into the forecast, RMA also suffered investment losses in the previous fiscal year, further weakening liquidity.
Investment losses in fiscal 2012 also prompted the academy to adopt a very conservative investment allocation. The academy increased its fixed income securities allocation to 95% earlier this year with the remainder to be held in cash equivalents. This conservative allocation, while limiting upside gain, should enable RMA to preserve its balance sheet resources.
INCREASED FUNDRAISING
Active fund raising initiatives, which were previously limited, are built into RMA's operational activities and are expected to offset annual expense growth. Contributions and grants including scholarship funds have increased from $848k in 2011 to over $2 million in fiscal 2013. RMA received pledges of $985,000 as of May 2013 and realized $275,000 of that amount as of October 2013. Fitch anticipates RMA will leverage its new fund raising practices to actively procure contributions for its capital needs going forward. Notwithstanding the aforementioned funding sources, RMA's ability to sustain improvement in its balance sheet resources can be impeded by volatility in the investment markets, which could reduce economic wherewithal of RMA's targeted benefactors and fund raising audience.
ENROLLMENT GROWTH EVIDENT
Enrollment levels have improved over the years, however the academy will continue to require consistent growth and solid retention for operations to improve. 460 students were enrolled at the end of the 2012-2013 school year, which was above target. Preliminary fall 2013 figures were lower than expected for new students (181 compared to 200), however, RMA's practice of enrolling students throughout the year should enable it to meet the goal of 443 students at years end. Fitch expects year end enrollment for RMA to meet or exceed the business plan and will monitor ending enrollment for fiscal 2014 to measure RMA's success with its admission initiatives.
The retention rate, 69% for fall 2013, is lower than fall of 2012 when 75% of former RMA students returned, an improvement from the previous four-year average (65%) retention rate. Fitch is less concerned with the drop in the retention rate as the 75% rate was an anomaly for RMA. RMA increased tuition and fees 4% for 2012-2013 and at about $31k annually, including room and board remains comparable to other boarding schools nationwide.
HIGH DEBT; MINIMAL FUTURE NEEDS
The debt burden remains high. MADS of $5.6 million consumes 32.6% of fiscal 2013 unrestricted operating revenues. Debt outstanding totals $71 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 which is currently outstanding in the amount of $1 million. RMA does not have significant capital needs and does not have any additional debt plans.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 2013);
--'Fitch Downgrades Riverside Military Academy, GA's $76MM Rfdg Revs to 'BB+'; Outlook Stable' (Nov. 12, 2012).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=804846
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