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Thursday, October 5, 2017

ROCKIN' AND ROLLIN'...DOWNHILL? Grand Traverse Academy's S & P Bond Rating Downgraded To “Junk” Status

On December 29, 2016, S&P Global Ratings issued a press release you may have missed: “Grand Traverse Academy, MI Bond Rating Lowered To ‘BB’ On Weakened Liquidity; On Watch Negative”.

S&P Global Ratings lowered its rating on the Grand Traverse Academy's series 2007 public school academy revenue and refunding bonds to 'BB' from 'BB+', and placed the rating on CreditWatch with negative implications. 

Non-investment grade bonds or “junk bonds” usually carry ratings of “BB+” to “D” (Baa1 to C for Moody’s) and even “not rated.” 

Bonds that carry these ratings are seen as higher risk investments that are able to attract investor attention through their high yields. However, investors of junk bonds should note the implications and risks that are involved with investing in bonds that are issued by companies with liquidity issues. 

“The lower rating reflects our conservative view of the school's weakened liquidity which still remains extremely thin for the rating category,” said S&P Global Ratings credit analyst Melissa Brown. 

“The CreditWatch action reflects our uncertainty with regards to the impact of GTA's potential additional debt plans on its credit profile, which in combination with the school's already weak liquidity position, could pressure operations and maximum annual debt service (MADS) coverage from levels that are currently sufficient for the rating.”

The junk rating was issued while the Grand Traverse Academy determined its now-disgraced former manager, Mark Noss, would not construct an expansion at the Traverse City campus and were instead seeking project financing with Tortoise Credit Strategies:

We understand GTA expects to borrow $4 million to finance its high school wing expansion and math and science center. At the time of our last review, management expected to enter into a lease to buy arrangement for the new facility, but we understand the school has since decided to purchase the property outright via a direct loan with a hedge fund. 

Management indicates that discussions related to the borrowing are still preliminary, but expects to finalize negotiations in the coming weeks and to close on the loan in early February 2017. 

Depending on the debt structure, we could view this as a substantially riskier profile with exposure to contingent liabilities, particularly since GTA's unrestricted reserves are not at a sufficient level to cover this potential exposure. 

Based on the final financing plan and the detailed credit pressures, we could potentially lower the rating by multiple notches. Given our level of knowledge in respect to the details of the contingent debt, we have not incorporated the impact of the debt into our analysis of the current rating. 

Did you catch this: “we could potentially lower the rating by multiple notches”?

S&P's take on the additional $4.0 million debt was that it could have driven the Grand Traverse Academy's rating even lower!

What's lower than junk? 

(S&P Global Ratings provides a Credit Rating only when, in its opinion, there is information of satisfactory quality to form a credible opinion on creditworthiness, consistent with its Quality of the Rating Process – Sufficient Information (Quality of Information) Policy, and only after applicable quantitative, qualitative, and legal analyses are performed. Throughout the ratings and surveillance process, the analytical team reviews information from both public and nonpublic sources. As of May 2017, the Grand Traverse Academy's rating remains BB.)

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