NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating to the following Industrial Development Authority of the County of Pima's New Plan Learning Inc. Project (NPLP) educational facility revenue bonds:
--$33.01 million tax-exempt series 2011A;
--$0.779 million taxable series 2011B.
The Rating Outlook is Stable.
The fixed rate series 2011A and taxable series 2011B revenue bonds (the bonds) are expected to be sold via negotiated sale in the month of August 2011. Proceeds of the bonds will be applied by New Plan Learning (NPL), a charter school property manager, to acquire and renovate four charter school facilities (transaction participants or charter schools); refinance mortgages and notes; and pay costs of issuance.
NPL consists of New Plan Learning, 250 Shoup Mill LLC and OG-Ohio LLC and is the sole member of each (the borrowers). Under substantially similar lease agreements, each borrower will lease charter school facilities to the transaction participants. The four charter school facilities are located in Illinois and Ohio. Chicago Math and Science Academy (CMSA) is located in Chicago, IL; Dayton High (Dayton), Toledo High (Toledo) and Springfield (Springfield) are schools located in Ohio and part of the Horizon Science Academy (HSA) schools. Lease payments collectively made by the transaction participants are structured to exceed debt service on the bonds.
For more information, please see Fitch's research report on NPL, dated May 25, 2011.
KEY RATING DRIVERS:
Rating Affirmed: NPL's rating is based on strong bondholder provisions and support and oversight offered by Concept, a successful and experienced charter management organization.
Experienced Charter Management Organization: Concept is an integral part of the schools' operating and academic success and all NPL schools under Concept are expected to comply with charter authorization requirements and maintain high academic standards.
Strong Legal And Structural Bond Components: Legal and structural bond provisions include prioritization of debt service (DS) payments to bondholders, provide excess cushion by tailoring lease payments to cover DS by 1.15 times (x) and maintain operating reserves at each school.
Standard Charter School Concerns: Offsetting the previously mentioned strengths are the participating schools' weak balance sheet resources, high debt burden and charter renewal risk, all of which are typical of most charters.
Declining State Funding: Pressured state funding environments can lead to reductions in per pupil aid payments to the participating schools in both Illinois (rated 'A'; Stable Outlook by Fitch) and Ohio (rated 'AA+'; Stable Outlook).
SECURITY:
The bonds are secured by the gross revenues of NPL primarily comprised of lease payments of four participant schools located in Illinois and Ohio. Additional bondholder protections include a mortgage on each transaction participant's facility; a debt service reserve, funded up to $3 million by National Cooperative Bank Capital Impact, a District of Columbia not-for-profit corporation, supporting the entire transaction plus an additional $1 million reserve funded by IFF, an Illinois not-for-profit corporation, specifically for CMSA; a capital and maintenance reserve of $1,000,000; a revenue fund with a balance of $500,000, a DS coverage ratio requirement of 1.1x annual DS; and cash on hand maintained at each of the participating schools equal to 10% of operating expenses.
CREDIT PROFILE:
Fitch affirms the 'BBB-' rating for NPL originally released on May 25, 2011. The transaction did not price subsequent to Fitch's initial rating release and was restructured. The new structure does not include two of the six schools previously participating in the issuance. The credit metrics of the transaction are slightly improved since one of the two schools removed had a weaker operating profile, being newer and in operation for less than two years. Financial medians for the four schools, based upon fiscal 2010 audited financial statements, include an operating margin of 8.9%, available funds to operating expenses of 7.35% and a relatively high debt burden of 23%, which compare favorably to like rated schools in the portfolio.
Of the four participating schools, Dayton is relatively new, initiating operations in 2009, while CMSA, in Chicago, is the largest and most mature, contributing over 50% of the annual lease payment that funds DS for the bond issue. While enrollment forecasts for the participants are reasonable in Fitch's view, predicting enrollment trends is accompanied by a level of uncertainty. Similarly, state funding levels especially in the current environment are subject to variability, reducing per pupil aid payments to the participant schools. Fitch employed stresses to the financial forecasts provided to ascertain sufficiency of revenues to meet DS for the schools on a cumulative basis. The stresses included multiple year state funding declines for all schools and an enrollment shock to CMSA, the strongest participant in the pool. Fitch maintained a 3.3% decline in state funding for all schools for the period of three years during which coverage levels for annual DS dropped to 0.93x. Additionally, with a two-year state funding cut of 3.3% annually, Fitch reduced enrollment for CMSA by 10% for the period of the stress (4 years). Cumulative funds available to cover DS dropped to 0.94x in this scenario. In both cases the support offered by the operating reserves at each school and the bond revenue fund provide more than sufficient liquidity to weather a shortfall.
NPL has strengthened its bond security provisions for the issuance by increasing its capital maintenance and operating fund allocation from $250,000 to $1 million and depositing $500,000 into the bond revenue fund. These enhancements are funded from bond proceeds and will be maintained through maturity. In addition, the four schools are required to maintain cash on hand equal to 10% (up from 8.5%) of annual operating expenses. Operationally, Fitch' expects Concept to strengthen individual NPL participant performance by actively managing expenses and balancing enrollment growth to generate net revenues sufficient to pay DS and the subordinated management fee.
Concept continues to be integral to the continued success of the four schools. Concept's management practices have historically driven strong academic outcomes and financial solvency. NPL was formed in 2005 by the founders of Concept to own and manage the physical facilities of the charter schools administered and managed by Concept. By separating NPL's facility management services and Concept's school management practices, each entity is focused on its core competency.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 20, 2011;
--'Charter School Rating Criteria', dated Jan. 23, 2007.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Charter School Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648052
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