NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'BB-' rating on the following educational facility revenue bonds for the Industrial Development Authority of the County of Pima. The bonds are issued on behalf of the New Plan Learning Inc. (NPL) Project:
--$32.57 million tax-exempt series 2011A;
--$545,000 taxable series 2011B
The Rating Outlook is Stable.
The bonds are secured by the gross revenues of NPL and are primarily comprised of lease payments from four participant schools (the participants) located in Illinois and Ohio. Participant lease payments are sized to exceed their allocated portion of debt service and meet 120% of maximum annual debt service (MADS) coverage requirement. A mortgage is provided on each participant's school facility.
KEY RATING DRIVERS
WEAK PARTICIPANT FINANCES: The 'BB-' rating for NPL's series 2011 bonds reflects the speculative grade credit profiles of the participants and the exclusion of contributions of any participating charters operating less than five years when calculating debt service coverage (DSC) in pooled transactions.
STRUCTURE PROVIDES COVERAGE CUSHION: The transaction's required reserves and participant annual lease payments, which are allocated in excess of debt service, provide incremental credit strength to augment what Fitch considers the weakest credit profile within a pool of four participants. Each charter school's standalone credit metrics reflect varying but generally speculative grade characteristics.
ENROLLMENT GROWTH SUSTAINED: Student demand at the OH schools is stable. Current student counts exceed management projections and if sustained and leveraged appropriately, should improve school performance.
MANAGEMENT ORGANIZATION STANDARDS HIGH: Concept Schools (Concept), the charter school management firm, requires high academic standards and overall compliance with each participant school's authorized charters.
ENROLLMENT GROWTH AND COVERAGE: The four schools' ability to transform enrollment growth into operating sustainability is imperative for ratings improvement. The inability to effect positive traction year over year would indicate a perennially weak pool of participants and will negatively pressure the rating.
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.
The pool participants include Chicago Math and Science Academy (CMSA), located in Chicago, IL; Horizon Science Academy (HSAD), located in Dayton, OH; and Horizon Science Academy Springfield (HSAS) and Horizon Science Academy Toledo (HSAT), both located in Toledo, OH. NPL leases charter school facilities to the participants for which it receives (from each school on a several basis) lease rental payments that are structured so that the combined lease payments cover debt service 1.2x per the bond documents. Fitch inquired about each school's charter status with its respective authorizer and gained comfort that each of the participants generally comply with their current charter terms.
LIMITED OPERATING HISTORY CONSTRAINS COVERAGE
The financial performance of the individual participants is a key consideration in ascertaining the credit strength of the pool to meet its lease payments, and therefore debt service obligations. Fitch acknowledges that DSC was achieved for fiscal 2013 and no notice of violation is currently posted for the current fiscal year. However, Fitch's approach to pool transactions excludes charters with less than five years of operating history or at least one renewal. HSAD, authorized in 2009, will complete five years of operations in the next year. Therefore HSAD payments toward DSC are excluded until that time; the school contributes approximately 22% of the annual debt service requirement. Lease payments from the three other participants who have more than five years of operating history, cumulatively yield less than 1x DSC, a feature consistent with a speculative grade credit rating.
DEMAND MEASURES STABILIZING
Fitch views the enrollment growth at each of the Ohio schools for 2012-2013 school year positively and notes the persistence of enrollment for the 2013-2014 school year. HSAT, HSAS and HSAD each enrolled 506, 430, and 348 students, respectively, for fiscal 2013; preliminary counts for fiscal 2014 indicate 540, 427, and 349 students at the respective schools. Fitch expects that stability in these counts and some growth expected at the HSAD campus will improve the consolidated financial performance of the pool. CMSA, the sole non-Ohio school, is at full capacity with 605 students for the current school year.
FINANCIAL AND DEBT PROFILES REMAIN SPECULATIVE GRADE
Fiscal 2013 operating performance generally improved for most schools as measured by margin performance. HSAD did not post an audit for fiscal 2013 and management reports that this is due to delays at the state level. This lack of an audited financial statement is viewed as a weakness. Fitch assessed the ability of each school to meet its annual lease payment, the relevant burden it places on operations, and the extent of liquidity available to each school to offset weak operations.
Each participant's credit characteristics marginally improved year over year, reflecting margins for fiscal 2013 ranging from 1.5% to negative 6.5%, MADS burdens that accounted for up to 21% of operating revenue, and net income available for debt service. Balance sheet resources at the individual participant level remain virtually non-existent. Fitch expects balance sheet resources to improve as enrollment drives improved financial viability in each of the OH schools.
BOND PROVISIONS NOT MET
Bond provisions for NPL are strong with multiple reserves providing an excess cushion and a required DSC ratio of 1.2x. Additionally, each participant is required to maintain cash on hand equal to 12% of annual operating expenses. This measure is not currently met by any of the four participants. While the required covenant violation is expected to be remedied by either a waiver or retaining a consultant, Fitch acknowledges that meeting this particular liquidity requirement is challenging during the ramp-up period.
Bondholders have a security interest in NPL's gross revenue fund in which the indenture requires NPL maintain no less than 12% of aggregate corporate revenues (the definition for which includes rents from non-financed schools). Other reserves held at the trustee and available to cover debt service shortfalls include the bond revenue fund ($500,000) and a cash funded debt service reserve funded at MADS. The capital and maintenance operating fund is currently being funded after depletion for an expansion of the original HSAT project. NPL is replenishing the fund over 36 months to its original size of $1 million. Fitch views the fund as a credit neutral factor.
All of the reserve balances are tested quarterly. Diminishment of balances at the bond revenue fund, coupled with insufficient balances at the NPL gross revenue fund could likely result in a rating action. Replenishment of the various reserves is subject to excess funds received from participant lease payments and would only occur after satisfying debt service.
Concept continues to be integral to the success of the four schools. Concept's management practices have historically driven strong academic outcomes and fiscal oversight at its other schools and Fitch believes this experience should bode well for long-term operations and financial performance of the four participant schools. NPL was formed in 2005 by the founders of Concept to provide a facilities solution for charter schools that were administered and managed by Concept.
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 New Plan Learning Inc. Project (OH) to 'BB-' (March 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Charter School Rating Criteria