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Phoenix Industrial Development Authority, AZ -- Moody's assigns initial Ba2 to Northwest Christian School, AZ's Series 2020A & 2020B bonds; outlook stable

Rating Action: Moody's assigns initial Ba2 to Northwest Christian School, AZ's Series 2020A & 2020B bonds; outlook stable

Global Credit Research - 27 Aug 2020

New York, August 27, 2020 -- Moody's Investors Service has assigned an initial Ba2 rating to Northwest Christian School, AZ's $7 million Economic Development Revenue Bonds (Northwest Christian School), Series 2020A and $800,000 Economic Development Revenue Bonds (Northwest Christian School), Series 2020B (Taxable), issued through the Phoenix Industrial Development Authority. The bonds have a final maturity in 2055. The outlook is stable.

RATINGS RATIONALE

The assignment of the Ba2 rating reflects Northwest Christian School's (NCS) sound market position as a large private independent school in Arizona with steady enrollment and relatively manageable leverage. The rating is offset by the school's very low total wealth and liquidity, small scope of operations, and very limited revenue diversity. The rating also incorporates the school's financial strategy, including board oversight of various policies, and management's track record of generally favorable results, in line with our governance analysis under our ESG framework.

Student demand is expected to continue, with the school projecting 1,470 students for fall 2020, slightly higher than the average of 1,465 from 2015 to 2019. Enrollment stability is aided by the school's identified market niche and by a tax credit program within the State of Arizona (Aa1 stable) which provides tax credits for donations made by individuals to school tuition organizations (STO) for the purpose of providing tuition assistance to in-state students attending private schools. However, this also leave the school vulnerable to any changes that could occur to the tax credit program. Tuition and fees made up a very high 89% of Northwest Christian School's operating revenue in fiscal 2019, and approximately 47% of that tuition revenue was received through STOs.

We expect the school to continue to generate overall sound operating performance, with debt service coverage in the 2.5x - 4x range. Favorably, operating performance improved in fiscal 2020 despite the coronavirus, which we regard as a social risk within our ESG framework given the substantial implications for public health and safety. The school's rapid response supports our view of future financial stability. NCS transitioned all academic programs to an online format in response to the outbreak of the virus and did not see an adverse effect on enrollment. NCS also implemented a spending freeze and other cost cutting initiatives that supported an improved operating margin in fiscal 2020. The school's weaker operating performance in fiscal 2019 was due to elevated one-time capital expenses, including replacing ventilation systems.

The school's approximately $1.5 million in total cash and investments as of June 30, 2019 is very low, and decreased from approximately $3 million the previous year as the school used cash to fund the construction of a classroom building. NCS reports cash and investments as of June 30, 2020 rebounded to roughly $3.3 million, including the $1.1 million of PPP loan proceeds that the school expects to be forgiven. However, with little donor support, material growth in total wealth remains unlikely. NCS is favorably reducing its exposure to variable rate debt and swaps through its proposed Series 2020 issuance, moving to an entirely fixed rate debt structure.

RATING OUTLOOK

The stable outlook incorporates our expectations of continued steady enrollment and sustained healthy operating performance. The outlook also reflects expectations that the school will maintain total cash and investments of at least $3 million.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Material increase in wealth and liquidity

- Sustained strengthening of operating performance

- Successful launch of online school initiative, yielding increasing tuition revenue and growing enrollment

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Decline in unrestricted liquidity

- Inability to maintain positive operating performance

- Additional debt absent significant growth in wealth and stronger operating performance

LEGAL SECURITY

The 2020 bonds represent an unconditional obligation of Northwest Christian School, secured by a lien on the school's receipts and revenues, a mortgage on the school's land and facilities, and a debt service reserve fund.

USE OF PROCEEDS

Proceeds from the proposed Series 2020A & 2020B bonds will be used to refund the school's outstanding 2013 bonds, terminate the associated swap, fund a debt service reserve fund, provide funds for capital projects and online school investments, and pay the costs of issuance. The portion of the proceeds used for capital projects will fund various capital improvement projects at the school. The funds to be used for investment in NCS's online school initiative will finance hardware and infrastructure improvements and other startup costs.

PROFILE

Founded in 1980, Northwest Christian School (NCS) is a private Christian school in Phoenix, Arizona. The school offers a religious-based curriculum in its programs that span early education (pre-kindergarten) through twelfth grade. In fall 2019, the school reported total enrollment of 1,473 students, of which, approximately 450 students were in high school grades 9-12.

METHODOLOGY

The principal methodology used in these ratings was Nonprofit Organizations (Other Than Healthcare and Higher Education) published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1160889. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Patrick McCabe Lead Analyst Higher Education Moody's Investors Service, Inc. 7 World Trade Center 250 Greenwich Street New York 10007 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Susan Fitzgerald Additional Contact Higher Education JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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