NEW YORK--()--Fitch Ratings has downgraded to 'BB-' from 'BB+' and removed from Rating Watch Negative the rating on approximately $89.2 million in outstanding revenue bonds, series 2011A/B, for the Florida Development Finance Corporation (FDFC). The bonds are issued on behalf of Renaissance Charter School, Inc. (RCS).
The Rating Outlook is Stable.
--Unrestricted revenues of the Financed Schools (defined below);
--A cash-funded debt service reserve fund;
--First liens on three of the financed facilities and a leasehold interest in the fourth.
The Financed Schools are: Hollywood Academy of Arts and Sciences, Hollywood Academy of Arts and Sciences Middle School (both at the Hollywood Facility), Duval Charter School at Baymeadows, Duval Charter High School at Baymeadows (both at the Baymeadows Facility), Renaissance Charter School at Coral Springs (at the Coral Spring Facility), and the Homestead Facility with students from Keys Gate Charter School and Keys Gate Charter High School.
KEY RATING DRIVERS
FINANCIAL METRICS DRIVE DOWNGRADE: Financial and debt profile metrics for the transaction are low speculative grade under Fitch's recently updated charter school rating criteria. The Financed Schools are in the midst of enrollment ramp-ups, with the majority opening within the past three years. The school generated a substantial negative GAAP margin on a consolidated basis in fiscal 2012, and did not cover Transaction Maximum Annual Debt Service (TMADS). Importantly, if financial and enrollment trends improve as projected, positive rating movement could be possible over the next several years.
INITIAL GROWTH ON TRACK: Offsetting the substantial financial risk, based on early fiscal 2013 counts, consolidated enrollment growth at the Financed Schools exceeds the aggressive base case projections for the second consecutive year. Fitch views this performance positively. As such, Fitch believes the relatively modest growth projections for fiscal 2014 and beyond are attainable.
EXPERIENCED MANAGEMENT DRIVES SUCCESS: The Financed Schools benefit from the experience and successful record of Charter Schools USA (CSUSA), which serves as their education management organization (EMO). CSUSA's EMO contracts are not coterminous with final maturity of the bonds. Fitch views this as a credit risk since the Financed Schools have virtually no management capability absent CSUSA. The agency does anticipate regular renewals given the schools' high reliance on CSUSA and its role in starting up the schools.
BENEFICIAL LEGAL PROVISIONS: Bondholders benefit from structural aspects of the transaction. This includes the consolidated revenue pledge of the Financed Schools and subordination of operating expenses along with CSUSA's management fees. Unrestricted revenues of the Financed Schools flow monthly to the trustee, with initial allocations to debt service;
CONTINUED ALIGNMENT WITH PROJECTIONS: If enrollment growth continues to meet or slightly exceed base case projections, financial performance could improve sufficiently to support upward rating movement within two years. That said, an investment grade rating is highly unlikely until the Financed Schools have all received at least one charter renewal.
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.
MEETING ENROLLMENT TARGETS
Combined enrollment at the Financed Schools of 4,857 (as of October 2012) slightly exceeded the base case projection for fiscal 2013 by 2.4%. Enrollment at all of the individual facilities is on track to meet or exceed the base case projection for the current year. Fiscal 2013 is the final year of projected double-digit enrollment growth. Fitch believes the Financed Schools will likely achieve their enrollment targets through the initial forecast period (fiscal 2016).
WEAK FINANCIAL AND DEBT PROFILE
Despite the positive enrollment trends, Fitch views the financial and debt profile metrics as low speculative grade. In fiscal 2012, the first year all Financed Schools were open, the combined entity (Renaissance Charter School, or RCS) generated a deeply negative 19.8% margin. Significant depreciation expense tied to the opening of several new facilities was a major factor in the deficit. The poor GAAP performance was in line with management's base case projection, which forecasts continued operating deficits until fiscal 2016.
Balance sheet resources were very light at the end of fiscal 2012, with available funds covering just 8% of operating expenses and 2.5% of pro-forma debt. Fitch does not anticipate substantial improvement in these ratios over the intermediate term.
Debt profile metrics for the transaction are also weak. On a consolidated basis, the Financed Schools covered TMADS by a low 0.5 times (x) from audited fiscal 2012 net income available for debt service as calculated by Fitch. The very high TMADS debt burden (33.8%) and coverage of pro-forma debt by net income available for operations (23x) are also low speculative-grade characteristics.
MANAGEABLE RENEWAL RSK
Representatives from the chartering agencies for the Financed Schools (Miami-Dade County Public Schools, Broward County Public Schools, and Duval County Public Schools) all reported stable working relationships with the Financed Schools they authorize. There were no reports of unresolved issues, or potential challenges to future charter renewals.
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