AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB+' rating on approximately $68.7 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.
The bonds are an absolute and unconditional obligation of RMA, secured by a first lien on the academy's campus and a cash-funded debt service reserve sized to maximum annual debt service (MADS).
KEY RATING DRIVERS
SOUND BALANCE SHEET LIQUIDITY: The 'BB+' rating primarily reflects RMA's balance sheet resources that, while depleted from previous years, still provide the academy with a sound financial cushion relative to operating expenses and outstanding debt, and partially offset its recurring operating deficits, revenue concentration, and high debt burden.
NARROWING OPERATING DEFICITS: The academy's operating deficits have narrowed over the past few fiscal years, although it's operating margin (on a full accrual basis) remains deeply negative. Enrollment growth, tuition increases, and careful expense management have enabled RMA to continue to reduce its deficit.
SUSTAINED ENROLLMENT GROWTH: RMA's student demand profile has improved, with steady annual enrollment growth over the past few years, despite annual tuition increases. Enrollment growth has so far exceeded the academy's multi-year business plan that was implemented in fiscal 2010 to improve operations.
HIGH DEBT BURDEN: RMA's debt burden remains very high, with MADS representing 31.7% of fiscal 2014 unrestricted operating revenues and the academy still reliant on endowment spending to cover annual debt service. Partially mitigating RMA's high leverage position are its lack of additional debt plans and limited capital needs, with fundraising expected to support future capital expenditure.
ENROLLMENT STABILITY: Rating stability is predicated on RMA's ability to maintain stable to growing enrollment levels, as student-derived tuition and fees represent the academy's dominant revenue source and are expected to support continued operating improvement. Lack of margin improvement could place downward pressure on the rating and/or outlook.
BALANCE SHEET LIQUIDITY: Continued erosion of balance sheet resources, absent sustained operating improvement, will further limit RMA's financial flexibility and could yield negative rating pressure.
Founded in 1907, RMA is as a military-style college preparatory school for boys, offering boarding and day school programs for grades 7-12. The academy is located on a 206-acre campus in Gainesville, Georgia, about 60 miles northeast of Atlanta.
BALANCE SHEET SUPPORTS RATING
RMA's balance sheet resources continue to provide the academy with a sound financial cushion for the rating category. However, at $36.5 million as of May 31, 2014, available funds declined for the fourth consecutive year from $50.1 million as of May 31, 2010. The decline is attributable to some investment losses, as well as continued endowment spending to support operations and cover annual debt service. Available funds still covered fiscal 2014 operating expenses ($20.6 million) by a solid 177% and outstanding debt ($70.9 million) by an adequate 51.5%.
Over the past few years, RMA reduced its exposure to alternative and equity investments, and as of fiscal 2014 no longer had any exposure to alternatives and limited exposure to equity markets. Fitch views the academy's shift to a more conservative investment strategy positively due to its ongoing operating deficits and reliance on endowment spending for operating support.
RMA's current liquidity position, although reduced from previous levels, remains a stabilizing factor for the rating. However, further balance sheet erosion, absent sustained operating improvement, could yield negative rating pressure. Conversely, strengthening balance sheet liquidity, coupled with continued operating improvement, could result in upward rating momentum over time.
OPERATING DEFICITS CONTINUE TO NARROW
RMA's fiscal 2014 operating margin remained negative but continued its trend of improvement. The margin improved to negative 15.4% from negative 18.9% in fiscal 2013 and negative 32.7% in fiscal 2010. Based on the academy's business plan, it is not anticipated to achieve a GAAP-based surplus for another few years. However, the fiscal 2014 margin was well ahead of the negative 28.6% average of the prior five-year period (2009-2013). Margins include the annual endowment draw, which was 7.4% (or $3.5 million) for fiscal 2014. Management's goal is to continue reducing this draw to around 5%, but that may also take a few years. Fitch considers a 7+% draw as unsustainable over the long term and will continue to monitor RMA's ability to continue reducing this.
Fitch notes positively that operating revenues continue to grow and are ahead of plan, due mostly to enrollment growth and steady tuition increases, with moderate, albeit growing, tuition discounting. At the same time, RMA continued to manage expenses, holding fiscal 2014 operating expenses flat with the prior year. However, expenses also exceeded the plan as RMA added new faculty and staff to accommodate its growing enrollment. The academy's fiscal 2015 budget shows continued improvement based on an average enrollment of 462 cadets compared to 454 in its fiscal 2014 budget.
SUSTAINED ENROLLMENT GROWTH
Enrollment typically fluctuates throughout the school year. RMA measures its initial fall enrollment, as well as tracks rolling enrollment levels as cadets leave and enroll during the year. Following a few years of enrollment declines in the mid-latter part of the last decade (2005-2008), enrollment grew steadily over the past few years. Initial fall enrollment grew to 435 in September 2013 from 423 the prior year and 292 in September 2008. Cumulative enrollment grew to 553, up from 546 in the 2012-2013 school year and up from 363 in 2008-2009. Final enrollment was 486, up from 460 in 2012-2013 and 319 in 2008-2009.
Initial enrollment increased to 472 as of September 2014 compared to a budget of 461. Current enrollment is 467 as students either withdrew, or were dismissed or expelled. Fitch notes positively that enrollment has grown faster than forecasted in RMA's business plan that was implemented in fiscal 2010. For 2013-2014, average and ending enrollment was 454 and 486 students, respectively, compared to a forecasted 401 and 450. Rating stability is partly predicated on RMA's ability to maintain stable to growing enrollment levels due to its high reliance on tuition and fee revenue; 82.5% of fiscal 2014 unrestricted operating revenue.
HIGH DEBT BURDEN
Debt outstanding of approximately $70.9 million as of May 31, 2014, consisted of the series 2007 bonds ($68.7 million) and a bank line of credit ($1 million drawn against a $2.5 million limit). The series 2007 bonds are fully amortizing fixed-rate debt, with level debt service of about $5.6 million. RMA's debt burden remains very high, with MADS consuming 31.7% of fiscal 2014 unrestricted operating revenues of $17.8 million. While still very high, this is the lowest the burden has been in several years, as revenues continue to grow modestly and no new debt has been issued or is planned. The burden was 41.1% in fiscal 2009.
Debt service coverage remains weak at under 1x. However, this also slightly improved from prior years. MADS coverage was 0.7x in fiscal 2014 after averaging 0.5x over the prior five fiscal years (2009-2013). Coverage continues to be met through endowment spending. RMA's high leverage position is partially offset by its lack of additional debt plans and limited capital needs.
The academy's capital plans remain moderate, with no major projects planned. Deferred maintenance items include some campus renovations and gradual replacement of RMA's aging bus fleet. However, these are expected to be fundraised for, which is viewed positively as Fitch believes the academy has no capacity for additional debt at the current rating level. Another housing facility may be needed if enrollment continues to grow. However, there are no immediate plans and management advised that if they were to add another facility it would be fully donor-funded.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 12, 2014);
--'Fitch Affirms Riverside Military Academy (GA) Rev Bonds at 'BB+'; Outlook Stable' (Oct. 11, 2013).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria