OREANDA-NEWS. Fitch Ratings affirms the 'A+' rating on approximately \\$37.1 million of currently outstanding series 2010 revenue bonds issued by Los Ranchos de Albuquerque, New Mexico on behalf of Albuquerque Academy (the academy).

The Rating Outlook is Stable.

SECURITY

The bonds are an unsecured general obligation of the academy, payable from all legally available funds.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'A+' rating reflects the academy's stable student demand and adequate balance sheet cushion. However, revenue flexibility is limited due to high dependence on tuition revenues and investment income. Additionally, the academy has a moderately high debt burden and risks related to variable rate debt instruments.

ADEQUATE FINANCIAL CUSHION: Liquidity ratios grew modestly in fiscal 2014 but remain weaker than pre-recession levels. Balance sheet resources, though consistent with the 'A' rating category, do not leave much cushion should balance sheet resources deteriorate further.

IMPROVED OPERATIONS: Operating performance, while still highly dependent on endowment spending to balance operations, improved in fiscal 2014 due to various expense containment and cost control measures.

STABLE DEMAND: The Academy's small but stable enrollment base is largely at capacity and benefits from very strong retention and student quality; however, cuts in the financial aid budget are reflected in weaker applications driving less selective admissions although the academy was able to maintain its desired headcount.

RATING SENSITIVITIES

BALANCE SHEET PRESERVATION: Central to the current rating and outlook are Fitch's expectation that the Albuquerque Academy will preserve its sizable endowment. Further diminishment of the financial cushion and failure to sustain recent improvements in operating performance will lead to a downgrade.

ENROLLMENT STABILITY: Any material change in Albuquerque Academy's enrollment could impact the rating, given the academy's fairly limited revenue raising ability and its high dependence on tuition revenues.

CREDIT PROFILE

The academy, founded in 1955, is an independent, co-educational college preparatory day school for grades 6 through 12. It is located in northeast Albuquerque on a 312-acre campus. The academy enrolled 1,129 students in fall 2014 compared to 1,110 students in fall 2013.

Similar to prior years, the academy's fiscal 2014 special purpose financial statements prepared by KPMG do not consolidate the academy's investment in its for-profit subsidiary High Desert Investment Corp. (High Desert) which is required in conformity with GAAP accounting. High Desert has ceased operations effective June 2012 and the academy does not expect to realize any economic benefit from or have any obligations to High Desert in the future. Management expects fiscal 2016 financial statements to be in conformity with GAAP accounting.

The class action lawsuit filed against the academy in fiscal 2013 in connection with High Desert has been settled. According to management, the academy has recorded a modest loss related to the lawsuit in fiscal 2015 (unaudited). Fitch does not expect the settlement to have significant impact on operations or balance sheet resources.

ADEQUATE LIQUIDITY

The academy's liquidity profile, its primary credit strength, continues to improve but is substantially weaker than pre-recession levels. Available funds, defined by Fitch as cash and investments not permanently restricted, totaled \\$57.2 million as of June 30, 2014 (excluding carrying value of land holdings and interests in beneficial trusts classified as temporarily restricted). Available fund remains sound, covering operating expenses and pro forma debt by 165.3% and 126.1%, respectively, in fiscal 2014.

The academy's asset allocation is moderately aggressive, with about \\$22.6 million of the investment portfolio exposed to limited partnership and private equity investments as of Dec. 31, 2014. When adjusting for illiquid assets per fiscal 2014 audited financials (\\$15.2 million), available funds are reduced to \\$42 million and covers operating expenses and pro forma debt by 121.3% and 92.6%, respectively.

Fitch views the academy's current liquidity ratios as consistent with the 'A' rating category; however, long-term sustainability of the endowment, given the draws for operations is a concern. Any further reduction in balance sheet resources could negatively impact the 'A+' rating.

BALANCED OPERATIONS

The operating margin has been historically negative with a heavy reliance on endowment to support operations. In addition, revenue diversity is limited with student-generated revenues representing a high 73% of fiscal 2014 unrestricted operating revenues, though this is common among private independent schools.

The academy's endowment spending policy is aggressive as compared to the traditional 5% for independent schools. The academy suspended its formal spending policy of between 4%-6% of the rolling three-year average in fiscal 2013. The board has designated a specific annual target for the next three years as part of a broader plan to gradually reduce endowment spending to more sustainable levels.

The endowment spend for operations is reduced in fiscal 2014 to \\$5.8 million (or about 5.9% of the \\$97.7 million endowment), from \\$6.0 million (or about 6.4%) in fiscal 2013, and is expected to be reduced further in fiscal 2015, fiscal 2016, and fiscal 2017 to \\$5.7 million, \\$5.4 million and \\$5.1 million, respectively. Fitch notes, however, that the total cash endowment distribution for operations regularly includes a supplemental draw which is higher due to other operational costs of the endowment and interest expense. When factoring in the supplemental draw, distributions increase to about \\$9.6 million or 9.8% of the endowment and the academy's fiscal 2014 operating margin improves to positive 11.3% compared to 10.7% in fiscal 2013. While the operating margin is positive, Fitch is concerned that the total level of the endowment draw is unsustainable over the long term.

Positively, operating improvement continued in fiscal 2014 due to reductions in financial aid and growth in net tuition revenues, combined with various cost containment measures (including reduced staff headcount and salary freezes). The academy's ability to continue reducing endowment spending while sustaining recent operating improvements is assumed in the 'A+' rating and Stable Outlook. An inability to do so will result in a rating downgrade.

STABLE ENROLLMENT

Offsetting the academy's concentration in student-generated revenues is its track record of stable enrollment and solid retention rates. For fall 2014, the academy enrolled 1,129 students, up 2.2% since fall 2010, and 1,124 is expected for fall 2015. Slightly larger incoming classes over the last two years are due to larger senior graduating classes.

The academy does not intend, nor does it have capacity, to grow enrollment too much past current levels. The academy largely recruits for grade 6 because there is little attrition of students once they enroll. For the last two years, the overall retention rate has exceeded 99%.

Fluctuations in the number of applicants and increasing financial aid needs have caused the academy to adjust its enrollment strategy to become less selective (59% for fall 2014). In recognition of its limited budget for financial aid, management decided to accept a higher number of students than in years past knowing that some families would not be able to enroll their child without financial aid assistance. Consequently, the acceptance rate increased but yield has remained fairly stable.

Overall, the academy has been successful in reducing its financial aid requirement to \\$4.35 million in fiscal 2015, compared to \\$4.57 million in fiscal 2014. With the current senior class largely supported by financial aid, it is expected that once this class graduates, financial aid requirements will be lowered. Furthermore, the academy is limiting the level of financial aid going forward for incoming classes.

Fitch views positively that the academy has continued to grow net tuition revenues despite increasing financial aid needs in prior years. However, Fitch recognizes that while the academy has gradually increased tuition rates, which has helped augment revenues, tuition rate increases are lower than historical levels to maintain affordability. The academy has limited capacity to grow enrollment from current levels, thus limiting revenue raising flexibility.

MODERATELY HIGH DEBT BURDEN

The academy's maximum annual debt service (MADS) burden is moderately high, which was always cited as a concern. MADS of \\$3.3 million represent 8.4% of fiscal 2014 operating revenues, inclusive of the endowment payout. Included in MADS is a variable rate \\$7.7 million restructured bank note with Bank of the West.

The academy's loan is fully hedged with an interest rate swap and is also fully collateralized with endowment assets of the academy. Fitch views positively the academy's lack of additional debt plans and adequate balance sheet resources offsetting increased risks related to the variable rate debt.