NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'BBB' rating on approximately $16.3 million in outstanding charter school revenue bonds, series 2008, for the Colorado Educational and Cultural Facilities Authority. The bonds are issued on behalf of the American Academy Project.
The Rating Outlook is Stable.
The series 2008 bonds constitute a general obligation of American Academy (AA) and are secured by a first mortgage lien over AA's Castle Pines campus (CP). A cash-funded debt service reserve provides additional bondholder protection.
KEY RATING DRIVERS
STATE MORAL OBLIGATION: The 'BBB' rating is based on AA'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 AA's debt service reserve fund.
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.
FAVORABLE OPERATING ENVIRONMENT: AA enjoys a supportive and productive relationship with the charter authorizer, Douglas County School District #1 (Fitch rated 'AA+'), strong community support evidenced by parent-teacher organization fundraising for school needs, academic performance consistently above state averages, and strong demand guided by a seasoned management team.
STATE FUNDING STABILIZATION: AA is heavily reliant on state-funded per pupil revenue but previously declining funding levels have begun to improve. Sound management practices tempered prior year funding reductions and enabled general operational stability.
WEAK FINANCIAL AND DEBT MEASURES: AA's GAAP-based operating margins were negative the past two years. In addition, the debt burden and debt service coverage are inconsistent with Fitch rated financial metrics for high-performing charter schools. AA's new campus in Parker, CO further pressures the charter school, as the campus carries significant debt (approximately $19 million) that is due in 2017. The inability to refinance this debt could cause credit pressure on the consolidated entity.
ADDITIONAL CAMPUS SHARES CHARTER: AA's second campus, located in Parker, CO, shares the same charter as CP. Fitch acknowledges the financial segregation of pledged funds servicing the associated debt; however, academic and financial performance of the Parker school influences the charter status for AA as a whole.
INCREASED CHARTER RENEWAL RISK: AA added an additional campus to its charter for fall of 2013. While CP has sufficient operating history, the new Parker campus lacks an operating history, and substandard performance could influence the charter renewal, which would affect both campuses.
STANDARD SECTOR CONCERNS: A limited financial cushion; substantial reliance on enrollment-driven and per-pupil funding are credit concerns common among all charter school transactions that if pressured, could negatively impact the rating over time.
STATE MORAL OBLIGATION PROGRAM
Under CO's moral obligation 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 AA'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, and 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 drawdown is less likely to be necessary.
DAUNTING NEW-CAMPUS DEBT LEVELS
The CP campus opened in 2005; AA opened a second campus in Parker, CO, in fall 2013. According to plan, the new campus enrolled 665 students and fielded a waitlist that underscored demand for the AA brand and instructional program. CP continued to have full enrollment of 895 students and a waitlist spanning 2.5x the capacity of the campus.
The second campus bears long-term debt of $20 million, payable solely by the Parker campus operations and associated balance sheet resources. The campus business and proprietary funds are not commingled and governmental funds for either campus cannot be utilized to subsidize the other. This separation of funds is viewed favorably as the Fitch rated series 2008 bonds are supported by CP operations, initiated in 2005.
Of the $20 million owed by the Parker campus, nearly $19 million is due by 2017 and AA expects to refund the debt prior to that time. In Fitch's view, an inability to refinance the debt would pose liquidity depletion and increased default risk if not managed proactively. While the Parker campus series 2012 bonds are also covered under the CO moral obligation program and secured by a reserve fully funded at maximum annual debt service (MADS), the final maturity payment (approximately $19.7 million) would not be considered regularly scheduled debt service and therefore not covered by the moral obligation. Fitch notes the distinction between pledged revenue for debt repayment between the campuses; however, it is highly likely that fiscal distress, from operations or debt driven, for the Parker campus could influence the rating on the series 2008 bonds.
THIN LIQUIDITY LIMITS OPERATING CUSHION
AA's cash surpluses, diminished from fiscal 2011 but slightly increased from fiscal 2012, maintain available funds of $1.77 million as of fiscal 2013. While relatively modest to investment grade rated peers, AA's financial cushion comprises 23.8% of operating expenses and 10.8% of long-term debt and offers limited operating flexibility for the school. Long term debt of $16.3 million corresponds to transaction MADS (TMADS) of $1.44 million, which consumes a relatively high 19.5% of unrestricted operating revenue. TMADS coverage from fiscal 2013 net available income from operations equaled about 1.1x. As per Fitch's charter school criteria, debt burdens in excess of 15% combined with a generally inconsistent track record of GAAP-based operating surpluses are indicative of speculative grade credits.
STATE FUNDING LEVELS STABILIZE
Per pupil revenues (PPR) is AA's primary funding source at 73.3% of revenues. PPR declined for three consecutive years (2010-2012) before increasing for fiscal 2014. AA's ability to effectively manage expenses and offset funding declines in previous years resulted in a 1.7% margin for 2011, a negative 1.7% margin for fiscal 2012 and slightly improved margin of negative 1.1% for fiscal 2013. Fitch views AA's budgeting practices as conservative; however, additional flexibility is required to achieve balanced operations. Acknowledging that the school does not budget annually to achieve a GAAP-based positive operating margin, Fitch notes that financially high-performing charters within the rated portfolio present positive margins on a consistent basis.
AA also receives property tax revenue generated by a mill levy override approved by district voters. AA's fiscal 2013 receipt of mill levy override revenues totaled $501,000, up from $349,000 in the previous fiscal year. The mill levy override was phased in for fiscal 2011 and will sunset in 2020. Charter school enrollment within the district continues to grow, which would reduce tax receipts allocable to each student going forward.
ACADEMIC SUCCESS DRIVES DEMAND
AA operations are at full capacity for CP. Fall 2013 enrollment of 895 students is supported by a robust waitlist. The Parker campus enrolled 665 students in its inaugural year of operations and is not expected to encounter hurdles to fill its seats in the upcoming year, given this initial success.
Demand for AA results from a track record of academic success measured by the Colorado Student Assessment Program (CSAP). Since inception (2005), AA students have outperformed both Douglas County School District (the district, rated 'AA+' by Fitch) and statewide averages across multiple grades in reading, writing, math and science proficiency examinations. This is particularly notable as the district's traditional schools typically rank as some of the highest performing in the state.
EXPERIENCED MANAGEMENT BENEFITS SCHOOL
AA is governed by an independent board of directors who oversee an experienced management team comprising proactive and focused individuals, some of whom participated in the founding of the school in 2005. Management's consistent focus on academic achievement, prudent stewardship of school resources in a stressed funding environment, compliance with all applicable charter covenants, and maintenance of a productive relationship with the charter authorizer is favorably viewed by Fitch.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Charter School Rating Criteria' (Sept 2012);
--'Revenue-Supported Rating Criteria' (May 2013);
--'Fitch Downgrades American Academy (CO) To 'BBB' (March 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Charter School Rating Criteria