NEW YORK--()--Fitch Ratings affirms and removes from Rating Watch Negative its 'BBB-' rating on approximately $8.3 million in revenue bonds for the California Statewide Communities Development Authority. The bonds are issued on behalf of the Green Dot Public Schools (GDPS), Animo Inglewood Charter High School (AI).
The Rating Outlook is Stable.
The bonds are secured by pledged revenues of AI, namely general purpose entitlement funds and categorical block grants from the state of California (general obligation bonds rated 'A-'by Fitch). Additional security provisions include a cash funded reserve equal to maximum annual debt service.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'BBB-'rating reflects AI's nine-year operating history, full enrollment, and positive operating performance. Weak liquidity is the primary offset to the aforementioned strengths.
FAVORABLE DEMAND TRENDS: Enrollment growth as a result of robust demand has supported a positive operating margin in five of the past six years.
MANAGEMENT EXPERTISE: GDPS' highly seasoned team possesses significant experience managing the academic, operational and financial needs of an 18 school network. GDPS network affords benefits such as negotiated vendor contracts and internally shared best practices.
MANAGEABLE DEBT BURDEN: Pro-forma maximum annual debt service (MADS) equals 12.1% of fiscal 2012 operating revenues and is covered 1.7x evidencing debt manageability.
STANDARD CHARTER RISKS: 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.
Demand for AI at its key entry points (ninth and tenth grade) continues to be directly correlated to its consistently strong academic outcomes. AI's graduation rate and first-to-second-year retention rate are strong, equaling 83% and 100%, respectively. Both measures surpass both local and state averages. AI enrolled 631 students in fall of 2012 and achieved its forecasted enrollment figures on schedule. While the facilities are authorized for up to 850 students, AI does not intend to serve more than the current student count in the near term. Fitch believes that a robust wait list supports AI's ability to fill vacated slots at any grade level.
Balance sheet resources for AI are light and retained at GDPS, the operating company that manages AI along with 17 other charter schools in Los Angeles County. Under the bond indenture, GDPS covenants to maintain a minimum unrestricted fund balance at AI equal to 5% of AI's operating expenditures in the previous fiscal year.
Based upon this covenant, AI would have access to approximately $206,800 of GDPS resources at fiscal year-end 2013 after payment of all operating expenses including the lease payment that funds debt service. These resources represented 4.1% of AI fiscal 2012 operating expenses ($4.1 million) and 2.6% of total debt ($8.03 million).
Fitch recognizes the limitations of a covenant based upon net asset balance, which are not necessarily liquid. Fitch also notes that unexpected balance sheet pressures could compromise GDPS' ability to provide funds, as needed, to AI. Offsetting this risk, to some degree, is GDPS' consistently sound financial performance and adequate resource base. As of June 30, 2012, GDPS' available funds, or cash and investments not restricted, totaled $21.2 million. This represents approximately 19.9% of total operating expenses ($101 million) and 22.1% of total outstanding debt ($96 million), including debt of AI.
AI generated a positive operating margin in six out of the last seven years. The margin was a solid 9.7% in fiscal 2012, however, weaker than 12.8% in fiscal 2011. Based on six-month interim financials, AI's expectation for a positive albeit lower operating margin in fiscal 2013 appear reasonable. Fitch favorably notes GDPS historical ability to carefully align operating costs with available revenues to achieve forecasted results. Additionally GDPS subordinates management fees to other operating expenses which included lease payments which equal debt service on the bonds.
State aid in the form of general purpose entitlement funds and categorical block grant funds represents AI's primary source of budgetary support (70% of total fiscal 2012 operating revenues). AI expects increases to per pupil apportionments (PPA) for fiscal 2013 but has prudently utilized prior year's levels. AI's 2013 budget is conservatively based upon the fiscal 2012 per pupil apportionment ($6,147). Excess funds generated by realizing a PPA above this level will boost operating surplus and improve AI's operating margin. Additional growth in net income is expected from the passage of Proposition 30 in November 2012 which should generate additional recurring funds for all GDPS schools.
Animo Inglewood is a charter high school, located in East Los Angeles, CA. Certified in 2001 and initiating operations in 2002 with 140 freshman students, AI has received two charter renewals since creation and its current charter is due for renewal in 2015. Including AI, GDPS serves approximately 7,800 students, across a network of 18 schools, in the highest need areas of Los Angeles. In return for a management fee equal to 8% of funding received from all public sources, GDPS schools enjoy favorable vendor contracts, share best teaching and financial management practices, and have access, both directly and indirectly, to GDPS's fundraising capabilities.
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'
Applicable Criteria and Related Research:
--'Charter School Rating Criteria' (Sept. 19, 2012);
--'Revenue-Supported Rating Criteria (June 12, 2012);
--'Rating Guidelines for Moral Obligations (April 20, 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
Rating Guidelines for Moral Obligations