Fitch Affirms Georgia Tech Athletic Association's Rev Bonds at 'A+'; Outlook Stable

Fitch Ratings affirms its 'A+' rating on approximately $214.8 million of outstanding revenue bonds issued by the Fulton County Development Authority on behalf of Georgia Tech Athletic Association (GTAA).

The Rating Outlook is Stable.

SECURITY

Unsecured general obligation of GTAA, payable from all legally available funds.

KEY RATING DRIVERS

INSTITUTIONAL ALIGNMENT: GTAA is strategically important to the Georgia Institute of Technology (Georgia Tech), serving an integral role in administering its comprehensive intercollegiate athletic program. Although GTAA is separately incorporated and Georgia Tech is not obligated to repay debt issued on its behalf, the priorities of both organizations are in close alignment, evidenced by an overlap in governance and institutional goals.

FUNDRAISING PROWESS: GTAA benefits from strong philanthropic support, bolstered by the development activities of Georgia Tech and the Georgia Tech Foundation (the foundation), including a $250 million component of Georgia Tech's $1.5 billion comprehensive fundraising campaign earmarked for GTAA's operations and capital needs.

DEFICIT-GENERATING OPERATIONS: Although not uncommon for a stand-alone, athletics-focused auxiliary enterprise, GTAA generates sizeable GAAP-based operating deficits. While financial results weakened in fiscal 2013, various cost saving initiatives and additional funding sources in fiscal 2014 and beyond (largely due to Atlantic Coast Conference [ACC] contracts) should serve to gradually improve operating performance.

HIGH DEBT BURDEN: GTAA maintains a high pro forma debt burden as a result of added leverage in recent years and use of non-level amortizing, back-loaded debt structures. The high debt burden is partly offset by GTAA's lack of additional debt plans and its robust fundraising ability.

RATING SENSITIVITIES

RELATIONSHIP WITH GEORGIA TECH: The rating is highly sensitive to GTAA maintaining its strategic alignment with Georgia Tech, along with the organizations' overlapping governance and institutional priorities.

GEORGIA TECH's GENERAL CREDIT: The rating is further supported by Georgia Tech's strong credit characteristics. Any change to Georgia Tech's credit profile would likely affect GTAA's rating.

CONFERENCE STABILITY: While not presently expected, instability within the ACC with regard to conference participants, revenue and cost sharing agreements, and external vendor contracts, could lead to operating stress and downward rating pressure.

CREDIT PROFILE

Established in 1934 GTAA is a nonprofit organization charged with administering the athletic programs of Georgia Tech. While legally separate from Georgia Tech, GTAA is a strategically important component of Georgia Tech's operating profile and functions as its collegiate athletic department. Georgia Tech's athletic facilities are owned by the Board of Regents of the University System of Georgia and leased to GTAA under long-term contracts at nominal cost. GTAA manages the facilities and is responsible for all operating and maintenance costs.

GTAA maintains a close relationship with Georgia Tech and is an integral part of its overall identity. As a premier public research university, Georgia Tech enjoys consistently strong student demand, which leads to demand for the intercollegiate athletic programs administered by GTAA, principally football and basketball. GTAA's connection to Georgia Tech, demonstrated through the alignment of their mission, institutional goals and management, is viewed positively by Fitch. In addition, while not legally obligated to do so, Georgia Tech has at times in the past provided operational support to GTAA when needed. Georgia Tech's strong financial profile is characterized by consistently positive operations; a significant level of balance sheet resources, inclusive of the foundation; robust fundraising; and a low debt burden.

GTAA's Fairly Diverse Revenues Tempered by Operating Deficits

While the rating is contingent upon the linkage with Georgia Tech, GTAA's revenue base, while concentrated in athletics-related activities, includes ACC distributions, ticket sales, advertising and sponsorships, student athletic fees, and gifts. Membership in the ACC provides for lucrative media contracts and corporate advertising and sponsorship agreements. ACC distributions represent the largest revenue source at 31.4% in fiscal 2013, with premium lease fees and ticket sales making up the second and third largest sources at 15.6% and 15%, respectively.

Revenue diversity remains offset by a track record of negative operations. However, operating performance weakened in fiscal 2013 due partly to some one-time events, as well as an increase in interest and depreciation expense as a result of added leverage and facility expansion over the past few years. In addition to the University of Georgia football game being an away game last year, which drove down ticket sales (as it does every other year), Georgia Tech played in the ACC championship game and was a late entrant in the Sun Bowl. These appearances resulted in Georgia Tech purchasing tickets that it was subsequently unable to sell, adversely affecting net operating income for the year. The ACC has since implemented changes that will cause financial losses of this nature to be shared by member institutions.

The deficit-generating operations continue to be supported by distributions made by the foundation from GTAA's endowments. Cost containment measures implemented over the past few years, coupled with projected revenue growth from the ACC's recent ESPN broadcasting agreement, are expected to improve operating performance going forward. Management anticipates operating improvement to be evident starting fiscal 2014 and continue going forward as television-related revenues increase under the ESPN agreement. Furthermore, the recent addition of new schools to the ACC should serve to enhance the ACC's profile.

Adequate Financial Cushion

GTAA's balance sheet liquidity is adequate and continued to improve during fiscal 2013. Available funds, defined by Fitch as cash and investments not permanently restricted, totaled $77.3 million as of June 30, 2013, covering a solid 110.3% of operating expenses ($70.1 million). Available funds covered a modest 33.1% of debt (about $233.7 million), although this is not atypical for a stand-alone university auxiliary enterprise. Investments continue to be managed by the foundation, along with the endowments of Georgia Tech and its various related foundations. Alternative asset classes make up about one half of the approximately $1.4 billion managed by the foundation.

High Debt Burden Mitigated by Fundraising and Lack of Additional Debt Plans

GTAA's debt profile includes mostly fixed-rate debt, a factor viewed favorably by Fitch. However, GTAA's debt structure includes two $30 million bullet payments on its series 2012 bonds in fiscal years 2020 and 2023, creating remarketing risk. At this time, it intends to refinance the bullet payments when due and fully amortize them over the remaining life of the bonds, which mature in fiscal 2043. Fitch believes GTAA maintains moderate financial flexibility to manage the various risks associated with bullet maturities and has detailed procedures in place to manage repayment of the bullets from its available resources in the event they are unable to refinance. GTAA's close relationship with Georgia Tech partially mitigates concerns over market access.

In July 2013, GTAA purchased an 11-acre golf practice facility from the foundation, which Georgia Tech's golf team had previously used at no charge. However, as the real estate market improved, the foundation unexpectedly decided to sell the property. After GTAA could not find a suitable replacement facility, they, along with Georgia Tech, decided to purchase the property. The $9 million purchase price was funded with a 10-year, unsecured, fully-amortizing, variable-rate bank loan. GTAA intends to use $1 million in additional television revenue it will receive annually under the ACC/ESPN contract to support debt service. The contract runs through 2027, while the loan matures in 2023. It also fundraised to offset the purchase price, with $8 million pledged to date.

Similar to many university auxiliary enterprises, GTAA has a high debt burden. Maximum annual debt service (MADS) of about $42.5 million is expected to occur in fiscal 2020 and represents a very high 74.5% of fiscal 2013 operating revenues. As MADS includes the $30 million bullet payment in fiscal 2020, Fitch also analyzed average annual debt service (AADS). AADS through fiscal 2043 equals about $15 million, resulting in a much lower but still high 26.4% debt burden. Debt service coverage from net operating income is below 1x due to GTAA's GAAP-based operating deficits, although it is supported on an annual basis by endowment distributions and the ongoing receipt of pledged gifts, reflecting its ability to fundraise for athletics-related capital projects. Fitch is comfortable with the level of coverage because of the historical endowment payouts and history of fundraising.

The debt burden is expected to moderate over time due to revenue growth from additional ACC revenues, fundraising initiatives, and lack of additional debt plans. However, at the current rating level, Fitch considers GTAA's additional debt capacity extremely limited, and the incurrence of additional debt, while not planned, would pressure the rating.

Concern over the high debt burden is further mitigated by GTAA's prudent capital planning and conservative budgeting practices. While athletic facilities will have ongoing capital needs, by policy, any new projects must first have an identified funding source and be aligned with Georgia Tech's campus master plan. GTAA benefits from significant donor support towards construction, operations and maintenance of facilities, and is in the midst of a $250 million capital campaign that is part of a broader $1.5 billion university-wide effort. To date, $228 million has been raised in cash and pledges.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

'Nonprofit Institutions Rating Criteria' (June 7, 2013);

'U.S. College and University Rating Criteria' (May 10, 2013);

'Fitch Rates Georgia Tech Athletic Association's Series 2012 Revs 'A+'; Outlook Stable' (Jan. 25, 2012).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049

Additional Disclosure

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http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=814036

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