NEW YORK--()--Fitch Ratings has downgraded to 'BB+' from 'BBB' and removed from Rating Watch Negative the following revenue bonds issued by the La Vernia Higher Education Finance Corporation, TX:
--$64.2 million, series 2009A;
--$677.6 thousand, series 2009B (taxable)
The bonds are issued on behalf of KIPP, Inc. (KIPP).
The Rating Outlook is Stable.
The bonds are secured by a senior lien on revenues and a lien on and security interest in certain real property on which KIPP's Houston area schools are located. Additional security features include a debt service reserve fund, an additional bonds test, and a partial debt guaranty.
The bonds rank on parity with $32.9 million of outstanding series 2006A revenue bonds (not rated by Fitch). The bonds are also senior to outstanding Qualified Zone Academy Bonds (QZABs) and Qualified School Construction Bonds (QSCBs) in the amount of $34.8 million and $17.4 million, respectively.
KEY RATING DRIVERS
LEVERAGE METRICS DRIVE DOWNGRADE: The downgrade primarily reflects KIPP's high leverage position. This is evidenced by an elevated net income available to cover pro-forma debt metric and limited track-record of achieving at least 1 times(x) coverage of maximum annual debt service (MADS) from operations.
SOUND DEMAND AND ENROLLMENT TRENDS: KIPP's strong reputation supports consistently healthy student demand and enrollment trends, which provides some operational and financial stability.
NARROW BALANCE SHEET: KIPP's balance sheet provides a limited cushion to manage unanticipated budgetary pressures, although concern is somewhat offset by its track-record of consistently positive operating performance on a full accrual basis.
STANDARD SECTOR CONCERNS: A modest 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.
LEVERAGE METRICS DRIVE DOWNGRADE
KIPP's pro-forma MADS of about $12.3 million, which conservatively excludes expected federal credit payments on outstanding QZABs and QSCBs, represents 14.6% of fiscal 2012 operating revenues. KIPP's limited track-record of achieving at least 1x MADS coverage from net operating income coupled with a moderately high pro-forma debt to net income available for debt service ratio (11.0x in fiscal 2012) are viewed as speculative-grade attributes. KIPP's expansionary plans, which are likely to be at least partly debt-financed, suggest that those leverage metrics will remain elevated over the intermediate term.
SOUND DEMAND AND ENROLLMENT TRENDS
KIPP enrollment has seen double-digit annual percentage growth in each of the past three years. Total headcount enrollment reached 9,551 students in academic year 2012-2013. These trends have been supported by stability at KIPP's mature schools and rising headcount at more recently established schools. At present, KIPP's enrollment base spans across nine campuses and 21 schools. This includes three schools that are managed by KIPP under partnerships with two local school districts. A new high school in KIPP's Northeast campus (already home to several KIPP primary and middle schools) is scheduled to open in academic year 2013-14.
In line with its long-term growth plans, management issued approximately $22.4 million of QZABs in late calendar year 2012 to develop, in various phases, a new primary, middle, and high school. Management reported that a healthy portion of students on KIPP's annual waitlist reside near the planned site, which should support the achievement of enrollment targets.
NARROW BALANCE SHEET
Available funds, defined by Fitch as cash and investments not permanently restricted, totaled $7.8 million at fiscal year-end 2012 and covered operating expenses and pro-forma debt by 9.6% and 5%, respectively. Fitch views KIPP's modest financial cushion as a negative credit factor, although some comfort is provided by its track-record of generating a positive operating margin (3.8% in fiscal 2012). Healthy operating results are bolstered by prudent financial management practices, which includes conservative per pupil revenue forecasting and budgeting for non-cash based expenses, namely depreciation and amortization. Fitch's review of interim fiscal 2013 operating results indicates another year of healthy performance.
One of KIPP's two state charters, authorized by the Texas Education Agency (TEA), expires in 2013. Fitch does not expect KIPP to encounter any challenges in the renewal process as management successfully amended this charter in August 2011, in a process similar to that of a charter renewal. In addition, KIPP successfully renewed its second charter in 2011, which marked its second consecutive renewal since 1996.
Fitch's actions are part of its completed industry-wide review, which commenced September of last year when Fitch placed all of its rated charter 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