NEW YORK--()--Fitch Ratings has upgraded to 'BBB' from 'BBB-' and removed from Rating Watch Negative $4.1 million in series 2002 revenue bonds for the Missouri Health and Educational Facilities Authority. The bonds are issued on behalf of St. Louis Charter School (SLCS).
The Rating Outlook is Stable.
The bonds are secured by a gross revenue pledge and a leasehold mortgage over SLCS' facility. The bonds are further secured by a cash-funded debt service reserve fund, a supplemental debt service reserve fund, and an intercept mechanism that directs state and federal funds directly to the trustee prior to being made available to the school for operations.
KEY RATING DRIVERS
RATING UPGRADE REFLECTS SUCCESSFUL TRACK-RECORD: SLCS' consistently positive financial results, stable enrollment trends, favorable leverage position, and history of multiple charter renewals underpin the rating upgrade. Importantly, recently passed state legislation stipulates that authorizers (as part of the charter renewal process) evaluate academic performance solely in relation to the home district. This new development eliminates Fitch's previous concern related to SLCS' academic performance relative to its statewide peers
HISTORY OF POSITIVE OPERATING PERFORMANCE: Despite some recent pressure in K-12 funding by the state of Missouri, SLCS registered its fifth consecutive positive operating margin in fiscal 2012. This primarily reflects the combination of prudent fiscal management and stable enrollment trends.
MANAGEABLE LEVERAGE POSITION: SLCS' transactional debt burden, which ranks among the lowest of all charter school's rated by Fitch, is regularly covered by at least two times (x) from net operating income. Fitch views this level of debt service coverage and the absence of near-term debt plans as a credit positive.
Further comfort regarding SLCS' leverage position is provided by management's lack of near-term debt plans.
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.
SUCCESSFUL TRACK-RECORD DRIVES RATING UPGRADE
SLCS' GAAP-based operating performance has been positive in each of the past five fiscal years (2008-2012), averaging 4.4% inclusive of a 4.7% margin in fiscal 2012. Favorable year-over-year financial results are supported by prudent financial planning. This includes conservative per pupil funding forecasts and management's practice of regularly budgeting for contingency reserves and certain non-cash based expenses, namely depreciation.
Given SLCS' high dependence on per pupil revenues (99.4% in fiscal 2012), favorable operating performance is also attributable to SLCS' ability to consistently achieve enrollment targets. Fitch believes that continued enrollment stability in fall 2012 in conjunction with continued demonstration of prudent financial management practices bodes well for fiscal 2013 operating performance.
SLCS regularly outperforms the local school district (St. Louis Public Schools, or SLPS) on standardized state exams. In the 2011-2012 academic year, the average percentage of SLCS' and SLPS' students across all grades achieving proficient and advanced proficient status in Communication Arts stood at 40.9 and 26, respectively, and in Mathematics, 39 and 25, respectively. Fitch views the healthy headroom in academic performance between SLCS and SLPS as a credit positive.
MANAGEABLE LEVEAGE POSITION
SLCS' series 2002A bonds are structured such that annual debt service is approximately $488,000 per year through fiscal 2022, followed by a final maximum annual debt service (MADS) payment of $993,000 in fiscal 2023. Similar to many other charter transactions, SLCS plans to utilize the debt service reserve fund (DSRF) of $500,000 to lessen the impact of the final maturity payment.
In calculating leverage ratios, Fitch considers transactional MADS debt burden and coverage, or MADS adjusted for the DSRF. SLCS' transactional MADS of $493,000 represented a relatively low 4.4% of fiscal 2012 operating revenues. This has been covered over two times by net operating income in each of the past five fiscal years (2008-2012). Additionally, SLCS' pro-forma debt to net income available for debt service metric was 3.4x in fiscal 2012, which further underscores debt manageability.
SLCS' charter was last renewed in 2010 for a period of 10 years (the maximum allowable under Missouri's charter school law at the time). Since SLCS' most recent renewal, the state passed Senate Bill 576, which revised the maximum allowable charter term from 10 to five years. SLCS' charter authorizer indicated that the existing charter will not be revised or renewed until 2020, which is nearly coterminous with the maturity of the series 2002 bonds (2022).
SLCS' available funds, defined by Fitch as unrestricted cash and investments, has grown in each of the past five fiscal years, increasing from $649,000 in fiscal 2008 to around $1.7 million in fiscal 2012 (excluding funds used to repay a then-outstanding promissory note). This covered fiscal 2012 operating expenses and pro-forma debt by 16.5% and 39.9%, respectively
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