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Breaking News: Albuquerque Academy’s Credit Rating

From the credit-rating agency Fitch Ratings comes this report dating from August 10, 2017. (It does not include data from the current school year.) Fitch’s analysis of “approximately $36 million of currently outstanding series 2010 revenue bonds, issued by Los Ranchos de Albuquerque, New Mexico on behalf of Albuquerque Academy” indicates a downgrade of the rating of these bonds from A+ to  A-, and a downgrade of the outlook for the bonds from Stable to Negative. The bonds in question are “an unsecured general obligation of the academy, payable from all legally available funds.” This is an analysis of the Academy’s expected ability to pay its debts.

Several important takeaways from this report:

The Academy’s enrollment base is close to capacity. Albuquerque is growing very slowly, wages in the city are not rising quickly, and the number of students whose families can afford full tuition is quite limited.

Although enrollment has risen for the last several years, applications are declining. “Since 2011 applications have declined to 400 (Academy-projected; 2017) from 633 and acceptance rates increased to 79% from 40%.” Fitch speculates that declining application rates are a reflection of the economies of Albuquerque and New Mexico as a whole; many families are, as we know, having trouble raising the funds to pay tuition. (On the positive side, families who do apply are more likely to be able to meet their financial obligation.)

The Academy’s reliance on its endowment as a source of operational funding is not sustainable. “Fitch views the academy’s trend in endowment draws as unsustainable with revenues sufficient to support operations requiring periodic draws from endowment funds at levels significantly above expected long-term investment returns. The draw has increased an average 3.3% over the last five years, growing to 11.7% of endowment funds to support operations in fiscal 2016 from 8.7% in fiscal 2012.” (emphases added)

And a bit of more reassuring news:

Student quality remains high. “Fitch views positively the academy’s reputation and student success which are evident in its high retention rates and college admissions rates among its graduates.”

Taken together, these items indicate an institution approaching crisis. While the Academy’s bond rating remains in the A range, unless the negative items above are addressed responsibly and promptly, we face the possibility of a further downgrade in the credit rating.

The Academy and its Board need to explain to the school’s stakeholders, its parents and employees, the specific actions they are taking to avoid a further downgrade in its credit rating. Protestations that “the endowment is being well-managed” are simply not enough.

 

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