NEW YORK--()--Fitch Ratings has downgraded to 'BB-' from 'BBB-' and removed from Rating Watch Negative the following educational facility revenue bonds for the Industrial Development Authority of the County of Pima. The bonds are issued on behalf of the New Plan Learning Inc. (NPL) Project:
--$32.57 million tax-exempt series 2011A;
--$545,000 taxable series 2011B
The Rating Outlook is Stable.
The bonds are secured by the gross revenues of NPL and are primarily comprised of lease payments from four participant schools (the participants) located in Illinois and Ohio. Participant lease payments are sized to exceed their allocated portion of debt service and meet 120% of MADS coverage requirement. Participants have several obligations to fund lease payments. Security is also provided by a mortgage on each participant's school facility and other structural enhancements described herein.
KEY RATING DRIVERS
WEAK PARTICIPANT FINANCES: The downgrade reflects application of Fitch's revised charter school criteria, the resultant sub investment grade credit profiles of the participants and exclusion of participants with less than five years of operations when calculating debt service coverage in pooled transactions. Debt service coverage is less than sum-sufficient excluding Horizon Science Academy Dayton's (HSAD) three years of operations.
CUSHION PROVIDES CREDIT STRENGTH: Fitch values the transaction's required excess cushion in various reserves and participant lease payments required in excess of their allocated debt service as providing marginal credit strength beyond what Fitch considers the weakest credit profile within a pool of four participants. Each participant reflects varying levels of stand-alone speculative grade characteristics.
ENROLLMENT GROWTH NOTED ACROSS SCHOOLS: The Stable Outlook acknowledges that all the OH schools recognized significant student growth, emerging from enrollment declines due to a delay in completion of certain amenities last year. Management achieved its projections for the overall student count a year ahead of schedule. Fitch expects each school to achieve its individual enrollment capacity and generate revenues to service modestly escalating lease payments.
EXPERIENCED CHARTER MANAGEMENT ORGANIZATION: The charter school management firm, Concept Schools (Concept), is a key component of the schools' operating and academic success, supporting high academic standards and compliance with all elements of each school's authorized charters.
STANDARD SECTOR 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.
ENROLLMENT PREDICATES OPERATING GAINS: The participants' inability to transform continued enrollment growth into consistent operating surpluses may negatively pressure the rating.
LIMITED OPERATING HISTORY AFFECTS COVERAGE CONSIDERATIONS
The financial performance of the participants is a key consideration in ascertaining the ability of NPL to meet its debt service obligations. The pool participants include Chicago Math and Science Academy (CMSA), located in Chicago, IL; HSAD, located in Dayton, OH; and HSA Springfield (HSAS) and HSA Toledo (HSAT), both located in Toledo, OH. NPL leases charter school facilities to the participants for which it receives (from each school on a several basis) lease rental payments that are structured so that combined lease payments cover debt service 1.2x per the bond documents.
Fitch's approach to pool transactions pursuant to the charter school criteria revision excludes any charter schools with less than five years of operating history or at least one renewal. HSAD was authorized in 2009, has less than five years of operations and is responsible for approximately 22% of the annual debt service requirement. Lease payments from the three other participants, each with more than five years of operating history, yields 0.88x coverage.
ENROLLMENT GROWTH IN OHIO SCHOOLS
Fitch views strong enrollment growth at each of the Ohio schools for 2012-2013 student year as credit positive. Delays in the bond financing and resultant postponed completion dates for the expansions constrained enrollment for the 2011-2012 student year but original project enrollment forecasts have now been exceeded. HSAT, HSAS and HSAT each enrolled 518, 430 and 350 students, respectively; up from 244, 267 and 238 students in the previous year. This growth is expected to translate into improved financial performance. In turn, it could support upward rating momentum over the intermediate term. CMSA, the sole non-Ohio school is at full capacity at 599 students.
WEAK FINANCIAL AND DEBT PROFILES
Operating performance for fiscal 2012 was weak and every school generated a negative margin. Fitch assesses the ability of each school to meet its annual lease payment, the burden it places on operations and the extent of liquidity available to each school to offset weak operations.
Each participant displays speculative grade standalone credit characteristics including MADS burdens that account for over 20% of unrestricted operating revenues. Additionally, net income available for debt service in each of the participants was insufficient to cover allocated MADS by 1x. Exacerbating this weakness is the lack of balance sheet resources which would normally offer some level of support to cover obligations. Fitch expects these metrics to improve as demand growth in each of the OH schools is reflected in fiscal 2013 results.
STRONG BOND PROVISIONS OFFSET PARTICIPANT FINANCES
Bond provisions for NPL are strong with multiple reserves providing excess cushion and a required debt service coverage ratio of 1.2x. Additionally, each participant is required to maintain cash on hand equal to 12% of annual operating expenses. This measure is currently being met by only one out of the four participants. While the required covenant violation is expected to be remedied by either a waiver or retaining a consultant, Fitch acknowledges that meeting this particular liquidity requirement is challenging during the ramp-up period.
Bondholders have a security interest in NPL's gross revenue fund in which the indenture requires NPL maintain at no less than 12% of aggregate corporate revenues (the definition for which includes rents from non-financed schools). Other reserves held at the trustee and available to cover debt service shortfalls include the bond revenue fund ($500,000) and a cash funded debt service reserve fund set at MADS. The capital and maintenance operating fund is also available but will likely fluctuate given its intended and recent use to fund an expansion of the HSAT project. While NPL is replenishing the fund appropriately (over 36 months), Fitch views the fund as a credit neutral factor.
All of the reserve balances are tested quarterly. Diminishment of balances at the bond revenue fund coupled with insufficient balances at the NPL gross revenue fund could likely result in a rating action. Replenishment of the various reserves are subject to excess funds received from participant lease payments and would only occur to the extent excess revenues after debt service are flowing.
Concept continues to be integral to the success of the four schools. Concept's management practices have historically driven strong academic outcomes and fiscal oversight at its other schools and Fitch believes this experience should bode well for long-term operations and financial performance at the participants. NPL was formed in 2005 by the founders of Concept to provide a facilities solution for charter schools that were administered and managed by Concept.
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. 19, 2012).
Applicable Criteria and Related Research
Charter School Rating Criteria
Revenue-Supported Rating Criteria