NEW YORK--()--Fitch Ratings has downgraded to 'BB' from 'BBB-' and removed from Rating Watch Negative the following series of bonds issued by the Pinellas County Educational Facilities Authority:
--$8,670,000 revenue bonds series 2011A;
--$160,000 revenue bonds series 2011B (taxable).
The bonds are issued on behalf of Pinellas Preparatory Academy, Inc. (PPA Inc.). The Rating Outlook is Stable.
The bonds are a general obligation of PPA Inc., which operates Pinellas Preparatory Academy (PPA), a charter school serving grades 4-8, and Pinellas Primary Academy (PPA Jr.), a charter school serving grades K-3. The bonds are further secured by a first mortgage lien over the facility in which the schools are co-located, along with a cash-funded debt service reserve.
KEY RATING DRIVERS
LIMITED HISTORY OF PPA JR.: The downgrade reflects the fact that PPA Jr. opened in 2011 and consistent with Fitch's revised criteria, schools with limited operating histories present substantial credit risk and are not included when calculating debt service coverage in pooled transactions. PPA alone is unable to fully cover transaction maximum annual debt service (TMADS) for the series 2011 bonds.
STABLE OPERATIONS: PPA's 10-year operating history, with multiple charter renewals; track record of enrollment growth, coupled with strong demand to date for PPA Jr.; and historically positive operating results, partially offset the aforementioned concerns and underpin the 'BB' rating.
IMPROVING FUNDING ENVIRONMENT: Funding cuts to public K-12 education pressured the schools' operations in fiscal 2012. However, funding stabilized somewhat in fiscal 2013 with a modest 2% increase.
STANDARD SECTOR CONCERNS: Additional credit concerns include revenue concentration, weak balance sheet liquidity and a high debt burden, all of which are characteristic of charter schools.
SUCCESSFUL ACHIEVEMENT OF FINANCIAL METRICS: PPA's achievement of certain financial metrics on its own merit, principally TMADS coverage; or on a combined basis once PPA Jr. reaches five years of audited operating history with at least one charter renewal, will likely result in upward rating pressure. PPA Jr.'s current charter contract expires in 2016.
CHARTER RELATED CONCERNS: A limited financial cushion; substantial reliance on enrollment-driven, per pupil funding; and charter renewal risk are credit concerns common among all charter school transactions that, if pressured, could negatively impact the rating over time.
PPA is unable to cover the carrying charges on the series 2011 bonds with current financial resources despite a track record of enrollment growth, solid academic performance and operating surpluses. PPA's fiscal 2012 net income available for debt service totaled $510,000 and covered TMADS ($738,000) by only 0.7 times (x). Under Fitch's charter school rating criteria (revised Sept. 19, 2012) a school having less than five years of audited operating history and no charter renewal is excluded from this calculation in pooled transactions.
While PPA Jr. has experienced strong demand to date and benefits from its affiliation with PPA, it has only completed one full academic year thus far (2011-2012) and is operating under its initial charter granted in 2011. Even when incorporating PPA Jr. into the debt service calculation, TMADS coverage improved only marginally to 0.8x for fiscal 2012.
The schools' debt burden is high. TMADS consumes a high 16% of the schools' combined fiscal 2012 operating revenues ($4.6 million). Total debt outstanding of approximately $8.8 million also represents a high 14.9x of combined net income available for debt service ($594,000). While high leverage ratios are not uncommon for the charter school sector, Fitch views a debt burden between 15%-20% and TMADS coverage of under 1x as speculative grade credit attributes.
Fitch notes as a credit strength PPA's 10-year operating history, with multiple charter renewals and solid demand trends and academic performance; coupled with a track record of operating surpluses. The schools also maintain a positive working relationship with their authorizer, the Pinellas County School Board (PCSB). PPA's charter was renewed for the third time by PCSB in 2010 for a period of 15 years. PCSB granted PPA Jr. an initial, five-year charter in 2011. Fitch views the schools' authorizer relationship and PPA's 15-year charter term (the longest term granted by PCSB) as a credit positive. This partially mitigates charter renewal risk. PPA continues to receive a letter grade of 'A' from the Florida Department of Education.
PPA currently enrolls 437 students in grades 4-8. Enrollment is capped at 440 students per its charter so Fitch expects enrollment levels to remain generally stable. Demand has been strong to date for PPA Jr., with 323 students enrolled in grades K-3. Enrollment is up from 287 students in 2011-2012 and is ahead of initial projection provided to Fitch of 246 students by 2012-2013. The schools also maintain an actively managed waiting list. A total of 485 students were wait-listed as of October 2012; 266 for PPA and 219 for PPA Jr. Fitch views the schools' nearly full enrollment and sizeable wait lists as reflective of the community need and demand for its programs.
PPA's operating margin dipped to 1.5% in fiscal 2012 from 3% the prior year due largely to a 10% cut in state funding for the 2011-2012 academic year (state of Florida general obligation bonds rated 'AAA' with a Negative Outlook by Fitch). Fitch views positively PPA's ability to generate a surplus despite the cuts as well as its demonstrated ability to average over 2% margins from fiscal 2008 to 2012. PPA Jr, like many new schools, generated a deficit for its first year of audited results in fiscal 2012 which yielded a negative 1.7% operating margin on a combined basis. Fitch believes the 2% funding increase and continued, modest enrollment growth at PPA Jr. should result in improved operating performance in fiscal 2013.
Fitch views continued enrollment stability and breakeven to positive operations critical as the schools' balance sheet resources provide little financial flexibility. On a combined basis, available funds (cash and investments not restricted) totaled just $361,000 as of June 30, 2012, covering fiscal 2012 operating expenses ($4.7 million) and debt ($8.8 million) by a very low 7.7% and 4.2% respectively. Following the renovation of the facility in 2011, the schools' have no more material capital or borrowing needs.
Fitch's actions are the result of its completed charter school industry-wide review, which commenced September of last year when Fitch placed all of its rated schools on Rating Watch Negative. Fitch will release an overview of its rating actions in a separate press release later today.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Charter School Rating Criteria' (Sept. 19, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Fitch Places All Charter School Bonds on Rating Watch Negative' (Sept. 29, 2012).
Applicable Criteria and Related Research
Charter School Rating Criteria
Revenue-Supported Rating Criteria