Fitch Ratings has affirmed the 'AA-' rating on the $67.1 million in revenue bonds, series 2009A, 2011, and 2013 A&B, issued by Bucks County Industrial Development Authority (PA) on behalf of the George School.
The Rating Outlook is Stable.
SECURITY
Revenue bonds are an unsecured general obligation of the school, payable from all unrestricted revenues.
KEY RATING DRIVERS
SOLID FINANCIAL CUSHION: George School's financial cushion, measured by available funds as a percentage of operating expenses and outstanding debt, provides the school with considerable financial flexibility, underpinning the 'AA-' rating and offsetting the school's softening operating margin and high debt burden.
WEAKENING OPERATING MARGIN: Following several years of operating surpluses, including distributions from the Barbara Dodd Anderson (BDA) Trust, the school experienced breakeven results in fiscal 2013, followed by an operating deficit in fiscal 2014. The deficit is partly attributed to additional facility expenses related to the opening of the school's new fitness center.
RELIANCE ON INVESTMENT PERFORMANCE: Management's plan to cover debt service on the bonds assumes revenue growth in future years, supported by additional investment returns associated with further endowment growth. Continued comfort is provided by George School's prudent management and oversight of its investment portfolio.
DEBT STRUCTURE LEADS TO HIGH BURDEN: Fitch continues to view George School's leverage position as a credit negative. Maximum annual debt service (MADS) consumed a very high portion of the school's fiscal 2014 operating revenues and its debt structure includes substantial deferment of principal payments. However, a solid level of unencumbered reserves and lack of additional debt plans partially mitigate these concerns.
RATING SENSITIVITIES
CONTINUED OPERATING DEFICITS: The school's inability to stem recent operating losses and gradually return to at least a breakeven level of operating performance on a full-accrual basis over the near term, could stress operations and result in negative rating pressure.
ADDITIONAL DEBT ISSUANCE: The issuance of additional debt (though not presently anticipated) without commensurate growth in available financial resources, would likely further pressure the school's current rating.
CREDIT PROFILE
George School is an independent, co-educational boarding and day school serving grades 9-12. It was founded in 1893 by the Religious Society of Friends (Quakers) and is located on 240 acres in Newtown, PA. Total headcount has been relatively stable over the past five years, with 539 students enrolled for fall 2014. This has been bolstered by generally increased selectivity over the past few years across both day and boarding students, while attempting to diversify the student population across geographic, racial, and socio-economic levels. The combined matriculation rate has remained solid, with more than half of accepted boarding and over half of accepted day school applicants enrolling in fall 2014.
STRONG FINANCIAL CUSHION OFFSETS WEAKENED OPERATIONS
A sizeable level of unencumbered resources continues to provide the school with a strong financial cushion relative to operations and debt, and partially offsets its recently softening operating margin and high debt burden. Available funds, defined as cash and investments not permanently restricted, totaled approximately $123.5 million as of July 31, 2014, up from $111.4 million as of July 31, 2013. Available funds covered fiscal 2014 operating expenses ($28.1 million) and long-term debt ($67.3 million) by a solid 4.4x and 1.8x, respectively.
Moreover, since Fitch's last review, George School has actively started a fundraising campaign targeting three areas: paying for the already-completed fitness and athletics facility, strengthening the annual fund, and building endowment support for faculty, scholarships, and promoting diversity. At least 80% of the $23 million in funds raised towards the completion of the fitness and athletics facility represents cash collected. Fitch views the school's fundraising capabilities favorably.
Since Fitch's last review in January 2013, George School has undergone two successive fiscal years of negative operating margins (negative 0.6% in fiscal 2013 and negative 2.3% in fiscal 2014), including distributions from the BDA Trust. The school has attributed the negative margins to the opening of the fitness and athletic center. While the new center comes with additional operating expenses that were realized immediately, the school anticipates that revenue support will phase-in in the immediate future. As such, the school projects incrementally eliminating its deficit by fiscal 2018. An inability to gradually reduce its deficit and return to at least a breakeven level of operating performance could lead to negative rating pressure.
LEVERAGE CONCERNS OFFSET BY STRONG LIQUIDITY AND RESERVES
George School's very high debt burden (11.3% in fiscal 2014) remains partially offset by its solid resource base. Moreover, the lack of major capital needs or additional debt plans over the next few years is an additional mitigating factor.
MADS totals approximately $8.1 million (fiscal 2041) and would consume 29.4% of fiscal 2014 unrestricted operating revenues. The high burden reflects the school's significantly back-loaded debt structure. Recognizing the structural impact of this debt configuration, Fitch also analyzes current debt service, which is level at approximately $3.1 million until principal amortization begins in 2031. Actual debt service consumed a high but much more manageable 11.3% of operating revenues in fiscal 2014.
Debt repayment is expected to be absorbed through revenue growth, supported by additional investment returns associated with further growing the school's general endowment. Fitch positively maintains that the school's governing board has demonstrated a clear commitment to growing the school's financial resources. Management has advised that they are setting aside reserves for debt service.
Fitch continues to view favorably the active oversight of the school's investment portfolio, with a subcommittee of the board meeting quarterly to review asset allocation policies, endowment performance, and investment strategies.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', dated June 16, 2014
'U.S. College and University Rating Criteria', dated May 12, 2014
'Fitch Rates George School (PA) Revs 'AA-'; Outlook Stable, Dated January 25, 2013
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=968955
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