NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to the following series of bonds issued by the Development Authority of Alpharetta Georgia on behalf of Fulton Science Academy (FSA):
--$17,800,000 Development Authority of Alpharetta (Georgia) educational facilities revenue bonds (FSA Project), series 2011A;
--$250,000 Development Authority of Alpharetta (Georgia) educational facilities revenue bonds (FSA Project), taxable series 2011B.
The bonds are expected to sell via negotiation the week of Sept. 26, 2011. Bond proceeds will be used to: finance the acquisition, construction, installation, and equipping of educational facilities to be operated by the middle and high schools; fund a debt service reserve (DSR); pay capitalized interest; and pay various costs of issuance.
The Rating Outlook is Stable.
SECURITY
Joint and several general obligation of Fulton Science Academy, Inc. (Fulton Science Academy Middle School, or the middle school), Fulton Educational Services, Inc. (Fulton Science Academy High School, or the high school), and Fulton Sunshine Academy (Fulton Science Academy Elementary School, or the elementary school; collectively with the middle school and high school, the borrowers or the schools), payable from all legally available revenues and secured by a first mortgage lien on the new campus.
KEY RATING DRIVERS
Solid Financial Operations: The borrowers generate sufficient net income from operations to pay debt service. Fiscal 2010 combined audited financial statements indicate 1.1 times (x) coverage of pro forma maximum annual debt service (MADS).
Demand Up, But Volatile: Last year's opening of the elementary school bolstered total enrollment, offsetting retraction at the high school. Middle school enrollment remained stable, with a substantial waitlist.
Manageable Construction Risk: The project plan includes a new campus on undeveloped land in an aggressive timeframe. Anticipated contract provisions mitigate some of the risk, but the borrowers have not selected a construction manager (CM) yet. The schools do have flexibility to continue operating in their current facilities, and already generate sufficient coverage of debt service at current enrollment.
Mixed Relationship with Authorizer: The borrowers' relationship with FCSD appears uneven reflected in unanimous approval of the high school charter renewal in 2009 by the district's board, despite the opposing recommendation by district staff. The 'BBB' rating reflects Fitch's opinion that charter renewal risk may be marginally above-average.
Standard Charter School Concerns: Additional concerns include weak balance sheet liquidity and a high pro forma debt burden.
WHAT COULD TRIGGER A RATING ACTION
Any Premature Additional Borrowing: The borrowers expect to pursue financing for a new elementary school facility on the new campus site over the intermediate term. Future financing not clearly supported by adequate financial resources could trigger negative rating action.
CREDIT PROFILE
Growing, But Uneven Demand
Fulton Science Academy Middle School opened in fiscal August 2002 as a start-up charter school authorized by FCSD. The district renewed the middle school's charter in 2007 for five years, and is currently reviewing the next renewal application. Middle school enrollment reached 510 students in fiscal 2009 and remains steady, despite a substantial waitlist of over 500 potential students.
The high school opened in August 2006 with 187 students. District staff recommended non-renewal of the charter in 2009 based on concerns, primarily regarding the high school's governance and finances. The high school responded by retiring an outstanding loan and revising its governance structure in line with staff recommendations. The FCSD board renewed the charter through 2015. Enrollment dropped 6.3% last year, partially due to the renewal uncertainty, but rebounded this fall to 285 students. Both the middle and high schools will move onto the new campus.
The elementary school opened last year with 436 students and a sizable waiting list. 549 students are enrolled for fall 2011, with over 350 on the waiting list. The school's facility lease runs through fiscal 2016. Management will seriously consider moving the elementary school onto the new campus at lease expiration. Any move would require new facility construction, and probably additional borrowing. Security provisions for this transaction include an additional bonds test, which Fitch views as providing only modest protection since it uses projected revenues.
Active Enrollment Management Yields Operating Flexibility
In fiscal 2010, the borrowers generated a strong 8.2% operating margin and operations covered MADS 1.1x. Unaudited fiscal 2011 results indicate a similar margin and improved coverage of 1.5x MADS. Management carefully controls enrollment to optimize funding from the state of Georgia (the state, general obligation bonds rated 'AAA/Stable Outlook' by Fitch) and FCSD. The district funds all schools based on class sizes and required staffing, rather than purely on a per-pupil basis. This enrollment range-based funding partially insulates the schools from enrollment swings. The borrowers also benefit from the district's record of offsetting decreases in state aid by increasing its own property tax levy.
No Growth Required
The base case begins with current year enrollment (official count completed on Aug. 26 for the elementary and middle schools and Sept. 2 for the high school) and assumes no overall growth following opening of the new facility. Fitch requested stress scenarios and determined the borrowers are well-positioned to handle cuts in funding, or enrollment declines. As charter schools, the borrowers retain substantial flexibility to reduce expenditures, including teacher salaries and benefits, in the event of funding declines.
Major Construction Project
The financed project is a significant undertaking for the borrowers. Their request for proposals (RFP) for a CM describes a 90,000 square foot facility constructed within 10 months for an August 2012 opening. In the event of construction delays, Fitch notes positively that management reports both the middle and high schools have flexibility to extend their current facility leases.
Management indicates several valuable construction risk mitigants will be included in the final contract, such as a guaranteed maximum price (GMP), guaranteed delivery date (GDD), and liquidated damages for late completion. The borrowers will not finalize selection of a CM until mid-September, leaving a short window to ramp up and begin construction by mid-October. The borrowers already engaged an architectural firm with substantial experience in school construction and design.
Sector Standard Weak Liquidity and High Debt Burden
Balance sheet liquidity is weak, although this is common for charter schools. Available funds for all borrowers totaled just $660,000 as of June 30, 2010, and covered operating expenses ($6.2 million) and pro forma debt ($17.8 million) by a low 10.6% and 3.7%, respectively. Driven by a strong operating surplus (unaudited), these metrics improved in fiscal 2011 to 16.6% and 8.5%, respectively. Pro forma MADS of $1.4 million consumes a high 21.4% of fiscal 2010 operating revenues (14.3% for unaudited fiscal 2011). Current lease payments paid by the middle and high schools (approximately $861,000) equal more than half of MADS.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from the underwriter.
Applicable Criteria and Related Research:
--'Charter School Rating Criteria' (Aug. 10, 2011);
--'Revenue-Supported Rating Criteria' (June 20, 2011).
Applicable Criteria and Related Research:
Charter School Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648052
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.