NEW YORK--()--Fitch Ratings has downgraded to 'BBB' from 'A' and removed from Rating Watch Negative its rating on approximately $7.7 million in outstanding charter school revenue bonds, series 2009, for the Colorado Educational and Cultural Facilities Authority. The bonds are issued on behalf of Crown Pointe Academy of Westminster project .
The Rating Outlook is Stable.
The bonds are general obligations of Crown Pointe Academy (CPA), secured by a first mortgage lien over CPA's facility. A cash-funded debt service reserve provides additional bondholder protection.
KEY RATING DRIVERS
STATE MORAL OBLIGATION: The 'BBB' rating is based on CPA's inclusion in the state of Colorado's charter school moral obligation program (the program), which provides a mechanism for the state to restore draws on the school's debt service reserve fund.
LEVERAGE METRICS DRIVE DOWNGRADE: The downgrade primarily reflects CPA's high leverage position, evidenced by a high net income available to cover pro-forma debt metric and a pro-forma transaction maximum annual debt service (TMADS) that is typically at or above 15%, coupled with just adequate coverage of TMADS; 1 times (x) in fiscal 2012.
SOUND OPERATING PROFILE: CPA's 15-year operating history, with multiple charter renewals and growing enrollment; track record of positive operating margins; and an adequate level of balance sheet resources counter the above concerns and result in an investment grade credit profile.
STRONG STRUCTURAL AND LEGAL PROVISIONS: Structural and legal provisions providing strong bondholder protection include the state's debt service intercept program and various reserve funds, reflecting a favorable statutory environment for charter schools.
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.
STATE MORAL OBLIGATION PROGRAM
Under the program, if a charter school draws on its debt service reserve fund and fails to replenish it immediately, the authority shall submit a certificate to the Governor certifying the amount necessary to restore the reserve fund to its requirement. The Governor shall then submit a request for appropriations to the legislature in an amount sufficient to restore the reserve fund. The general assembly then, at its discretion, may appropriate to restore the reserve fund.
In order to qualify for the program, a school must merit an investment grade credit profile at the time of bond issuance, and participate in the Colorado Charter School Intercept Program. Under the intercept program, the state Treasurer pays a portion of the school's monthly per pupil revenue distribution directly to the trustee in amounts sufficient to pay debt service requirements.
The rating builds upon Fitch's view of the underlying credit quality of the charter school (bottom-up analytic approach). Moral obligation program bonds are secured separately by each school. Fitch views each bond as project-specific. The state is actively engaged in debt issuances under the moral obligation program. The statute provides clear mechanisms to trigger the state's moral obligation. In addition to the moral obligation, the statute also provide an additional backstop (the state charter school debt service reserve fund, or CSDSRF) so that an additional appropriation due to a debt service reserve draw down is less likely to be necessary.
HIGH DEBT BURDEN
Pro forma MADS of about $1 million represents a very high 34.1% of fiscal 2012 operating revenues. CPA's debt service schedule follows the fairly typical charter school structure which incorporates a large final year payment, with the intent of using the balance of the debt service reserve to offset this payment. Therefore, Fitch also looks at TMADS, which excludes the final year payment, as a better indicator of typical debt service costs over the life of the bonds. This translates to approximately $505,000, resulting in a high 17% burden. Total debt outstanding to fiscal 2012 net income available for debt service was also very high at 14.5x.
CPA has been able to cover TMADS from operations for the past three fiscal years, which Fitch views favorably. However, coverage was just adequate at 1x in fiscal 2012 based on net income available for debt service of $529,000. Fitch considers TMADS coverage of just 1x and a debt burden of 15%-20% high speculative grade credit attributes.
CPA's limited balance sheet resources are reflected in its available funds (cash and investments not permanently restricted) which totaled $1.45 million as of June 30, 2012. However, available funds covered fiscal 2012 operating expenses ($2.94 million) and debt ($7.66 million) by a respectable 49.2% and 18.9%, respectively. Balance sheet resources are expected to remain limited, yet stable. Nonetheless, CPA's liquidity metrics are stronger than those of most other charter schools rated by Fitch and partially mitigate concern over CPA's high debt burden and modest debt service coverage.
STABLE DEMAND FUELS SOUND OPERATING PERFORMANCE
Student demand for CPA remains stable and the school maintains an actively managed waiting list of 426 students for the 2012-2013 school year. For 2012-2013, total enrollment grew to 433 students in grades K-8 from 415 the prior year. CPA's funded pupil count is 416 (compared with 393 the prior year). CPA has added classes to each grade in phases over the past few years. A second seventh grade class was added for the 2012-2013 school year, with a second eighth grade class expected to be added for 2013-2014. Given recent enrollment patterns and demand to date, Fitch believes CPA's enrollment targets are reasonable.
Enrollment growth has enabled CPA to generate consistent operating surpluses. While still positive, the operating margin fell to 1.3% in fiscal 2012 from 23.4% in fiscal 2011 due to one-time capital grants and contributions received in fiscal 2011. Typical of charter schools, CPA's primary funding source is per pupil revenue (PPR) received from the district, which represented a high 89.3% of the school's fiscal 2012 operating revenues.
CPA's dependency on enrollment-related PPR and its relatively small size, results in limited revenue flexibility and emphasizes the need to carefully manage enrollment. Following modest state cuts over the past few years, PPR will remain relatively flat for fiscal 2013 at approximately $6,732. No further cuts to public K-12 education are anticipated at this time.
CPA's successful operating history continues to be reflected in its students' scores on state assessment tests, which generally meet or exceed proficiency. In addition, while CPA is subject to the sector standard charter renewal risk, this concern is partially mitigated by CPA's track record of charter renewals, having received its third, five-year charter renewal in 2010 from Adams County District No. 50 (the district). Fitch spoke with a representative from the district, who stated the relationship with CPA remains positive and cited no issues at present that would result in non-renewal of the school's charter or cause disruption to its funding.
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
Revenue-Supported Rating Criteria
Charter School Rating Criteria