OREANDA-NEWS. Fitch Ratings assigns an 'A+' rating to the approximately \$45.4 million of Build NYC Resource Corporation revenue bonds (Ethical Culture Fieldston School Project), series 2015, issued on behalf of the Ethical Culture Fieldston School (ECFS).

The bonds are expected to price via negotiation the week of March 16, 2015. Proceeds will be used to finance various capital projects totaling \$25-30 million and refinance ECFS' two series of outstanding revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by ECFS' student tuition and fee revenues, pursuant to a loan agreement between ECFS and Build NYC Resource Corporation.

KEY RATING DRIVERS

STRONG STUDENT DEMAND: Consistently robust student demand and high selectivity underscore ECFS' strong enrollment picture. Combined acceptance rates for all grade levels remained in a tight range of 15-17% annually from fall 2010-2014.

BALANCE SHEET PROVIDES FLEXIBILITY: Robust balance sheet resources provide considerable flexibility to support financial operations and redeem outstanding debt, as has been ECFS' practice. The fiscal 2014 ratios of available funds to operating expenses and pro forma debt equaled a high 153.4% and 239.4%, respectively.

CONTINUED BALANCE SHEET IMPROVEMENTS: The 'A+' rating incorporates a successful fundraising campaign and no plans to issue additional debt beyond the current offering, both of which should continue to benefit ECFS' balance sheet over the long term.

NEGATIVE OPERATING MARGINS: Negative operating margins on a GAAP-basis until fiscal 2014 underscore ECFS' reliance on endowment fund support. Margins averaged -1.5% annually, as calculated by Fitch, over the past five fiscal years.

RATING SENSITIVITIES

ENDOWMENT SUPPORT: A prolonged period of weak investment returns that threaten the endowment payout could lead to negative rating action.

BALANCED OPERATING MARGINS: Positive GAAP-based margins beyond the current capital campaign suggesting more balanced financial operations, coupled with a growing endowment fund, could lead to positive rating action.

CREDIT PROFILE

Felix Adler founded the co-educational, non-sectarian ECFS in 1878 to foster a student-centered and experiential learning environment. The school provides pre-kindergarten through twelfth grade education at two campuses on the upper west side of Manhattan and the Riverdale section of the Bronx. Fall 2014 total enrollment remained steady at 1,709.

ECFS is accredited by the New York State Association of Independent Schools. The 10-year accreditation was most recently performed in the 2012-2013 academic year.

STRONG STUDENT DEMAND AND ENROLLMENT

ECFS' consistently strong demand and enrollment metrics include an average of approximately 1,500 total applications annually with little deviation since fall 2010. High selectivity, too, demonstrates the competitiveness of its programs. Combined kindergarten acceptance rates for the two campuses averaged 13.3% since fall 2010 with a nearly two-thirds matriculation rate. The ninth grate acceptance rate hit a low 10% in fall 2014. Moreover, the matriculation rate hit a high 68.3% that year.

Attrition rates are a low 3% annually over the past five years, according to management. Moreover, the high school has 100% graduation and college attendance rates.

REVENUE PREDICTABILITY AND CONCENTRATION

Strong demand and enrollment provide for greater revenue predictability and pricing power. However, ECFS' revenue structure is highly concentrated in student tuition and other fees (84% of fiscal 2014 unrestricted operating revenues), as is typical of similar types of institutions. This presents some risk that year-to-year enrollment changes, while not currently expected, could introduce a degree of volatility to the operating performance.

ECFS' recent history of negative GAAP-based operating margins is noteworthy. However, it is not uncommon for similar schools that draw considerable support from strong endowment funds. Operating margins averaged -1.5% annually from fiscal 2010-2014. The margin turned positive in fiscal 2014 (2.3%) with an outsized \$1.6 million increase in gifts and contributions to \$5.4 million, a trend that should continue with the current capital campaign. Gifts and contributions, as well as endowment spending, typically help reduce the extent of negative margins.

BALANCE SHEET SUPPORTS RATING

ECFS' balance sheet is its foremost rating strength and a source of significant financial flexibility. Moreover, available funds ratios have improved considerably in recent years with strong endowment returns. ECFS' endowment totaled \$94 million in fiscal 2014.

The ratios of available funds to operating expenses (153.4%) and long-term debt (324%) have grown by approximately 50% and 100%, respectively, since fiscal 2010. In addition, the ratio of available funds to pro forma long-term debt remains strong at 239.4%.

MANAGEABLE LEVERAGE

ECFS demonstrated its balance sheet strength in the spring of 2008 when it redeemed its \$25 million series 2005A adjustable rate bonds. More recently, ECFS called its \$9.5 million series 2005B-3 bonds in December 2014. Currently outstanding debt includes two series of fixed rate bonds totaling a modest \$24 million at Dec. 31, 2014. The current issuance of bonds, too, will be in fixed rate form.

ECFS' modest use of leverage is reflected in a low debt burden of 2.2% in fiscal 2014. The pro forma maximum annual debt service (MADS) burden, reflecting the expected issuance, is moderately high at 7.3%. However, pro forma MADS coverage of 1.7x in fiscal 2014 provides some comfort that the debt burden is manageable.

LONG-TERM CAPTIAL PLANS

ECFS' capital plan positions it for the longer term. The plan addresses deferred maintenance and other needs principally identified in the school's 2013-2018 strategic plan. Total cost estimates range from \$69 million-\$80 million, including \$45.4 million of deferred maintenance. The school has no additional debt plans beyond the current offering.

ECFS is in the planning stages for its next capital campaign totaling \$90 million, a portion of which has been raised to date. In a positive indication of its fundraising ability, ECFS' annual fund giving has increased in each year since fiscal 2010 to \$4.1 million in fiscal 2014. High contribution rates in fiscal 2014 included 76% of active parents and 19% of alumni. ECFS' annual fund provides necessary resources to meet the operating budget.

ECFS completed its first capital campaign, Promises to Keep, in May 2005 to support the expansion and renovation of the school's Bronx campus. The campaign raised \$52 million.