NEW YORK--(BUSINESS WIRE)--Fitch Ratings places the 'BB+' rating on $9.3 million in education revenue bonds issued by the Beasley Higher Education Finance Corporation on behalf of FOCUS Learning Academy, Incorporated (Academy, FLA, FOCUS) on Rating Watch Negative.
The revenue bonds are secured by a pledge of FOCUS' gross revenues, a cash-funded debt service reserve and a mortgage on property and facilities.
KEY RATING DRIVERS
CHARTER RENEWAL PENDING: The Rating Watch Negative reflects Fitch's heightened concern relating to FLA's charter, which is currently pending renewal, but expired in July 2013. The renewal of the charter, which can be reasonably expected within the fiscal year (FY) would resolve the Rating Watch. Conversely, non-renewal or a less than full term renewal could result in a downgrade.
WEAK FINANCIAL METRICS: The 'BB+' rating continues to reflect the Academy's speculative grade financial metrics. FLA's two consecutive years of declining margins further diminish the school's balance sheet flexibility and result in a high debt to income measure and debt service coverage (DSC) below 1x for FY13. These credit characteristics remain speculative grade attributes for Fitch charters.
ENROLLMENT CHALLENGES: The Academy's budgeted enrollment figures fell short of projected levels in two consecutive years resulting in a slimmer margin in FY12 and a negative margin for FY13. FLA adjusted their FY14 budgeted enrollment to reflect modest growth, which should enable improvement in operational results.
GOVERNANCE LACKS INDEPENDENCE: While demonstrating effective management, overlap between FOCUS' board of directors and day to day administration team weakens the independent oversight mechanism that Fitch's revised criteria expect to be present in an investment grade charter school.
IMPROVEMENT IN OPERATIONS AND COVERAGE: The Academy's inability to stabilize margins and achieve DSC levels above 1x in the coming year could negatively affect the current rating.
STANDARD SECTOR CONCERNS: A modest financial cushion, substantial reliance on state per pupil funding, and charter renewal risk are credit concerns common in all charter school transactions that, if pressured, could impact the rating over time.
DEBT ISSUANCE: The incurrence of any additional debt prior to achieving enrollment growth and operational stability to support the debt, could pose negative rating pressure.
Located in Dallas, TX Focus is a K-12 charter school that received its first charter in 1998 and started with an initial enrollment of 177 students in grades K-6. The Academy's instructional program includes its multi-sensory approach to education, which results in the development of specialized curricula for 'learning different' students. This cohort currently makes up approximately 20% of the student body.
ENROLLMENT TARGETS ADJUSTED
For FY14 FLA's current enrollment of 871 students is better reflected in the budget compared to previous years where the Academy, based on historical successes, included rather optimistic enrollment expectations. FOCUS' waitlist, presented at the end of February 2014 included 69 students which is much weaker compared to fall waitlists noted in previous years that totaled more than twice the number. Fitch notes that FLA's previous expectations of growing enrollment by over 100 students every year predicated unsustainable cost structures that resulted in two years of increasingly negative financial operations. The Academy's ability to utilize closer to actual enrollment figures and budget appropriately could improve operations going forward.
OPERATIONS EXPECTED TO IMPROVE
FOCUS is solely reliant on per pupil funding sources for its operating revenues. Fiscal 2014 results are expected to reflect slight state funding improvement as well as a modest uptick in enrollment. Fitch positively notes FLA's ability and decision to implement expense cuts to balance the budget in FY13. FLA's fiscal 2012 (0.4%) and 2013 (-4.7%) operating margins trended negatively and reflected the school's unmet enrollment expectations. The aforementioned tempering of enrollment expectations and expense cuts from the previous year prompt Fitch's expectation of improvement in margins for fiscal 2014. Management expects to use actual enrollment levels to implement future staff and expense increases, which Fitch views positively.
WEAK LIQUIDITY AND COVERAGE
Resource growth declined in fiscal 2013 as a result of the minimal operating surplus. Available funds declined to $1.07 million or 10.7% of fiscal 2013 operating expenses ($9.9 million) and 10.8% of total outstanding debt ($9.9 million). These measures declined from FY12 and Fitch views this financial cushion as low. Net income available for debt service weakened for FY13 and the covenant requirement of 1x coverage of transaction maximum annual debt service ($817,000), was not achieved requiring FLA to hire a consultant. Fitch's long-term debt to net income available, which essentially measures years of debt-financed cash flow increased to 14x from 8.7x in FY12 further reflecting operational weakness. FLA's debt burden (MADS as a percent of operating revenue) of 8.9% is stronger than most charters and annual debt service obligations are approximately level through final maturity in 2041.
FLA has plans for future facility expansion, driven by enrollment growth and need to provide ample instructional resources for the student base. Fitch is concerned that any additional debt plans would further pressure FOCUS' balance sheet resources. Issuance of additional debt or loans to fund this expansion in the absence of a commensurate growth in resources levels to support its repayment would be viewed negatively.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Charter School Rating Criteria' (Sept. 19, 2012);
--'Revenue-Supported Rating Criteria (May 2013);
--'Fitch Downgrades Focus Learning Academy to 'BB+' (March 2013).
Applicable Criteria and Related Research:
Charter School Rating Criteria
Revenue-Supported Rating Criteria