Old Redford Academy, Mich., Lowered to BB by S&P

Standard & Poor's Ratings Services said it has lowered its long-term rating to BB from BBB-minus on Michigan Finance Authority's series 2005 and series 2010 bonds, issued on behalf of Old Redford Academy and placed the ratings on CreditWatch with negative implications.

"The rating actions reflect our view of Old Redford Academy's adequate, but weak, financial metrics in conjunction with the increased credit risk posed by the IRS' revocation of the tax-exempt status of the Clothilde R. Smith Charitable Foundation, the school's foundation," said Standard & Poor's credit analyst Avani Parikh.

The IRS automatically revoked the tax-exempt status, effective Nov. 15, 2011, for failure to receive the foundation's form 990 filings for the past three fiscal years. According to management, the foundation's accounting firm has prepared its form 990s in a timely manner every year and procedures have since been implemented so that this situation does not occur again in the future.

According to the series 2010 and 2005 bond documents, the loss of the foundation's tax-exempt status constitutes a covenant violation, which could mature into an event of default, unless corrected or corrective action is taken and diligently pursued within 45 days of written notice from the trustee. According to management, the trustee has not yet issued such written notice but has been notified of the situation. In addition, management indicates that the foundation has filed the appropriate forms with the IRS to request retroactive reinstatement of its tax-exempt status and expects resolution within the next 90 days.

Standard & Poor's expects to receive timely disclosure from school officials regarding the outcome of the IRS' review and the financial impact, if any, to the foundation and school. Should the covenant violation mature into an event of default, it would result in immediate acceleration of the bonds. The outcome of the IRS' decision will also indicate whether there is any taxable impact to bondholders. Standard & Poor's will continue to monitor the school's performance and complete a full review pending the outcome of the IRS' decision, which, as previously noted, management expects within the next 90 days.

The downgrade reflects Standard & Poor's opinion of the increased vulnerability to the school's credit profile, especially due to its limited liquidity position and operational flexibility, as well as the need for stronger management and governance practices, in light of the nature of this issue and the delay in making this information public.

Currently, Standard & Poor's deems the school's financial profile still adequate, with breakeven to small operating surpluses posted in each of the past three fiscal years; maximum annual debt service coverage greater than 1x; and a weak, but adequate liquidity position. In Standard & Poor's view, the school's enrollment and demand profile provides rating support, with continued enrollment growth for the past several years, a healthy waiting list, stabilizing student retention and strong graduation rates.



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