Fitch Affirms Renaissance Charter School's (Florida) Series 2011 Rev Bonds at 'BB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BB-' rating on the Florida Development Finance Corporation's (FDFC) approximately $89.2 million revenue bonds, series 2011A/B. The bonds are issued on behalf of Renaissance Charter School, Inc. (RCS).

The Rating Outlook is Stable.

SECURITY

The bonds are jointly secured by lease payments made from the unrestricted revenues of seven Florida charter schools (the financed schools); a cash-funded debt service reserve; and first liens on three of the financed facilities and a leasehold interest in the fourth.

Bondholders benefit from structural aspects of the transaction, including the consolidated revenue pledge of the financed schools; subordination of operating expenses along with Charter Schools USA's (CSUSA) management fees; and unrestricted revenues of the financed schools flowing monthly from RCS to the trustee, with initial allocations to debt service. Annual bond covenants include liquidity tests and a 1.1x debt service coverage covenant (adjusted for management fees) commencing in fiscal 2014.

KEY RATING DRIVERS

LIMITED OPERATING HISTORIES: The financed schools are still in the midst of enrollment ramp-ups, with the majority opening within the past four years. As such, the schools' financial and debt profiles remain speculative grade under Fitch's charter school rating criteria.

WEAK, BUT IMPROVING FINANCIAL PERFORMANCE: The schools generated a negative GAAP margin on a consolidated basis in fiscal 2013, although the deficit narrowed greatly from the prior year; and while the schools did not cover transaction maximum annual debt service (TMADS) per Fitch's calculation, debt service coverage was at least 1x per the bond documents.

INITIAL GROWTH ON TRACK: Offsetting the financial risks, consolidated enrollment growth at the financed schools exceeded the base case projections for the third consecutive year. Fitch views this enrollment growth, as well as the school solid academic performance positively.

EXPERIENCED MANAGEMENT: The financed schools benefit from the management oversight and successful track record of CSUSA, which serves as their education management organization (EMO). CSUSA's various EMO contracts are not coterminous with final maturity of the bonds. Fitch views this as a credit risk since the financed schools have virtually no management capability absent CSUSA. Fitch anticipates regular renewals given the schools' high reliance on CSUSA and its role in starting up the schools.

RATING SENSITIVITIES

CONTINUED ALIGNMENT WITH PROJECTIONS: If enrollment growth continues to meet or slightly exceed base case projections, financial performance could improve sufficiently to support upward rating momentum. However, this rating movement is unlikely until the financed schools have all received at least one charter renewal.

STANDARD SECTOR CONCERNS: A limited financial cushion; substantial reliance on enrollment-driven per pupil funding; and charter renewal risk are credit concerns common in all charter school transactions that, if pressured, could negatively impact the rating.

CREDIT PROFILE

The financed schools are Hollywood Academy of Arts and Sciences, Hollywood Academy of Arts and Sciences Middle School (both at the Hollywood Facility); Duval Charter School at Baymeadows and Duval Charter High School at Baymeadows (both at the Baymeadows Facility); Renaissance Charter School at Coral Springs, and the Homestead Facility with students from Keys Gate Charter School and Keys Gate Charter High School.

Three of the financed schools (Hollywood Academy of Arts and Sciences, Hollywood Academy of Arts and Sciences Middle School, and Keys Gate Charter School) have been open between eight and 11 academic years and each have received at least one charter renewal. The remaining schools have only been open since either the 2010-2011 or 2011-2012 academic years, reflecting the limited operating history of the series 2011 transaction.

Fitch continues to view the strong oversight provided by CSUSA and solid academic performance of the financed schools (each receiving a letter grade of either 'A' or 'B' from the Florida Department of Education) as a partial offset to their limited track records and lack of renewal history. Per Fitch's criteria, contact is also to be made with the schools' charter authorizers. However, Fitch had limited direct authorizer contact during this review cycle.

CONTINUE TO MEET ENROLLMENT TARGETS

Combined enrollment at the financed schools was 6,160 (as of October 2013), up from 4,857 as of October 2012 and slightly ahead of their fiscal 2013 base case projection 6,035. Enrollment at all of the individual facilities remains on track to meet or exceed the base case projection for the current year. Fiscal 2013 was the final year of projected double-digit enrollment growth, and Fitch believes the financed schools will likely achieve their enrollment target of 6,730 students through the initial forecast period (fiscal 2016).

WEAK FINANCIAL AND DEBT PROFILE; IMPROVEMENT ANTICIPATED

Despite the positive enrollment trends, Fitch views the financial and debt profile metrics as low speculative grade. In fiscal 2013, the second year all of the financed schools were open, the combined operating margin was a negative 3.4%, which was a significant improvement from the negative 20.7% margin generated in fiscal 2012. Significant depreciation expense tied to the opening of several new facilities was a major factor in the deficit. The GAAP-based performance is in line with management's original base case projection, which forecasts continued operating deficits until fiscal 2016, albeit moderating each year. Going forward, continued, modest enrollment growth at the newest schools, coupled with an improved state funding environment should bode well for the schools' operating performance and generation of sufficient debt service coverage (on a combined basis).

Characteristic of the charter school sector, balance sheet resources remain very light. Available funds as of June 30, 2013 totaled $4.8 million, up from $2.2 million at fiscal-year-end 2012. Available funds covered just 13.9% of fiscal 2013 operating expenses ($34.9 million) and 5.5% of outstanding debt (approximately $87.1 million). While these liquidity metrics demonstrated modest improvement over fiscal 2012 levels, Fitch does not anticipate substantial improvement in these ratios over the near term.

The debt profile metrics for the transaction are also weak. On a consolidated basis, the financed schools covered TMADS by under 1x from audited fiscal 2013 net income available for debt service as calculated by Fitch. The very high TMADS debt burden (21.3%) and coverage of outstanding debt by net income available for operations (11.1x) are also speculative-grade characteristics.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Charter School Rating Criteria' (Sept. 19, 2012);

--'Fitch Downgrades Renaissance Charter School's (FL) 2011 Revs To 'BB-' (March 3, 2013).

Applicable Criteria and Related Research:

Charter School Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688957

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822954

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Colin Walsh, +1-212-908-0767
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Susan Carlson, +1-312-368-2092
Director
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Colin Walsh, +1-212-908-0767
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Susan Carlson, +1-312-368-2092
Director
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com