Fitch Affirms Riverside Military Academy (GA) Rev Bonds at 'BB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BB+' rating on approximately $66.9 million of Gainesville Redevelopment Authority, GA series 2007 revenue refunding bonds issued on behalf of Riverside Military Academy (RMA).

The Rating Outlook is Stable.

SECURITY

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

MIXED FINANCIAL PROFILE: The 'BB+' rating primarily reflects this military-style boys' college preparatory school's recurring operating deficits, revenue concentration, and very high debt burden. Partially offsetting factors include adequate balance sheet resources that, while depleted from previous years, continue to support the rating.

IMPROVED OPERATIONS: RMA's margins have improved but were still negative on a full accrual basis in fiscal 2015 (and projected fiscal 2016). However, enrollment growth, tuition increases, and expense management have enabled RMA to steadily reduce its deficit over time.

RELATIVELY STABLE ENROLLMENT: RMA's small student population continues to see some growth, even with modest annual tuition increases. Enrollment at the start of fall 2015 exceeded management's expectations in the academy's 2010 multiyear business plan; however, the enrollment level fluctuates throughout the year.

HIGH LEVERAGE: RMA's debt burden remains very high, with MADS representing 27.6% of fiscal 2015 unrestricted operating revenues. The academy remains modestly reliant on endowment to cover annual debt service, as institutional coverage had been less than 1.0x in fiscal years 2010-2014, and 1.0x in fiscal 2015. RMA has no new debt plans at this time, with fundraising expected to support capital expenditures.

RATING SENSITIVITIES

ENROLLMENT STABILITY: Riverside Military Academy's inability to maintain stable enrollment, given the academy's significant reliance on net tuition and fees, could negatively pressure the rating.

BALANCE SHEET LIQUIDITY: Continuation of positive trends in RMA's balance sheet ratios are necessary to maintain the current rating. Any significant deviation from the current level of the academy's financial cushion may have negative rating implications.

CREDIT PROFILE

Founded in 1907, RMA is 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.

Beginning June 2016, Col. William Gallagher was installed as the ninth President of RMA after the retirement of Col. James Benson. Col. Gallagher's professional background includes serving as Dean of the College and Commandant of Cadets at Valley Forge Military Academy, Chief Operating Officer for New York University in Abu Dhabi, as well as 28 years as an active Army officer.

BALANCE SHEET STILL SUPPORTS RATING

RMA's balance sheet resources continue to support the rating. Available funds (AF), defined by Fitch as unrestricted cash and investments, remained flat over the prior year at $36.3 million at May 31, 2015, equal to a solid 169.7% of expenses but a more modest 52.6% of debt.

Preliminary fiscal 2016 results indicate that available funds ratios will be similar or slightly lower than one year prior. The nominal amount of AF has been flat or declined modestly in recent years, due to investment losses and use of the endowment to support annual debt service. RMA's current liquidity position, although reduced from previous levels, continues to support the rating.

OPERATIONS IMPROVE THOUGH REMAIN NEGATIVE

Operating deficits persist; however, RMA's operating margin improved significantly to negative 4.5% in fiscal 2015 compared to negative 15.4% in fiscal 2014. There has been modest but steady operating improvement since at least fiscal 2010. Improvement in fiscal 2015 operations is a direct result of a 15% year-over-year increase in net tuition and fees during the 2014-15 academic year. Preliminary fiscal 2016 operations indicate that the margin is expected to be similar or slightly weaker than fiscal 2015. Increased capital expenditures and deferred maintenance will be partially offset by strong fall 2015 (fiscal 2016) enrollment gains.

At Fitch's last review, management indicated its goal was to lower its endowment draw to 5% over several years, per the investment policy adopted by RMA's board. The draw for operations was 4.4% in fiscal 2015; however, for fiscal 2016 management expects its endowment draw to be approximately 6%. Fitch considers the more traditional draw of 5% of endowment market value as sustainable over the long term, and will monitor operations and the endowment draw over time.

Fitch notes positively that net operating revenues continue to grow and are ahead of plan, due mostly to enrollment growth, steady tuition increases, and moderate tuition discounting. RMA management reports it continues to monitor and contain operating expenses. The Stable Outlook is based on Fitch's expectation that RMA will sustain recent operating improvement supported by improved enrollment trends. Reversal in operating improvement could lead to negative rating action.

STEADY ENROLLMENT

Enrollment typically fluctuates during an academic year. RMA measures its initial fall enrollment and tracks rolling enrollment as cadets leave and enroll during the year. Enrollment has grown following declines during 2005-2008. For fall 2015 (fiscal 2016), initial enrollment increased to 526 cadets from 485 the prior year. During the academic year, enrollment through April 2016 was 623, but ended the year at 534, as 89 students either withdrew, were dismissed, or were expelled.

For fall 2016, RMA is slightly under budget as of August 2016, but management underscored that the academy typically enrolls up to 100 new students throughout the remainder of the academic year. Fitch views RMA's rating stability as partly predicated on the academy's ability to maintain stable-to-growing enrollment given its high reliance on tuition and fee revenue (averaging 83% of unrestricted operating revenues over the past five fiscal years) in conjunction with its ability to manage through fluctuations.

HIGH LEVERAGE

Outstanding debt was $66.9 million as of May 31, 2016. 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 fiscal 2014 MADS equal to 27.6% of unrestricted operating revenues. No new debt is planned, and Fitch views RMA as having no additional debt capacity.

Debt service coverage had been below 1.0x fiscal 2010-2014, and 1.0x in fiscal 2015. The academy uses reserves and its quasi-endowment to pay part of debt service. Management reports that no bond covenants have been violated, and Fitch will monitor operations over time for continued improvement in debt service coverage and any moderation in the academy's high debt burden.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. College and University Rating Criteria (pub. 12 May 2014)

https://www.fitchratings.com/site/re/748013

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011459

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Sahil Khera
+1-212-908-0868
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Tipper Austin
Associate Director
+1-212-908-9199
or
Tertiary Analyst
Mark Pascaris
Director
+1-312-368-3135
or
Committee Chairperson
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Sahil Khera
+1-212-908-0868
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Tipper Austin
Associate Director
+1-212-908-9199
or
Tertiary Analyst
Mark Pascaris
Director
+1-312-368-3135
or
Committee Chairperson
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com