NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'BBB-' rating on approximately $21.8 million of outstanding California Statewide Communities Development Authority school facility revenue bonds, series 2011A issued on behalf of Alliance for College-Ready Public Schools (Alliance).
The Rating Outlook is Stable.
The bonds are payable from lease payments made by three Alliance-managed charter schools (Ouchi High School, Skirball Middle School and O'Donovan Middle Academy) and secured by an assignment of rents and deed of trust over the school facilities. Lease payments constitute a joint and several obligation payable from the schools' gross revenues. Additional bondholder protections include a cash-funded debt service reserve sized to maximum annual debt service (MADS) and a capital maintenance and operating fund.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISITICS: The three obligated charter schools' (the schools) track record of operating surpluses; sound coverage of pro forma MADS from current operations; and a manageable, albeit high, debt burden, underpin the 'BBB-' rating. Financial performance remains tempered by limited, yet growing, balance sheet resources that provide only a thin cushion for operations and outstanding debt.
STABLE STUDENT DEMAND: The schools maintain full and stable enrollments, supported by strong programmatic and fiscal management provided by Alliance, a well-established charter management organization (CMO) that manages a successful network of 26 Los Angeles area based charter schools serving 11,000 students in grades 6-12.
CHARTER RENEWAL SUCCESS: The schools' operating histories are limited, although they continue to mature and now have three charter renewals among them, with the youngest of the three schools (O'Donovan Middle Academy) having recently been merged into the oldest of the three (Ouchi High School) to form a continuous grade 6-12 program under a single, recently renewed five-year charter.
MANAGEMENT INTERRUPTION: Any adverse change or interruption to the existing CMO relationship between Alliance and the schools, while unlikely, would strongly influence the rating.
CHARTER RELATED CONCERNS: A limited financial cushion; substantial reliance on enrollment-driven, per pupil funding; a high debt burden; and charter renewal risk are credit risks common among all charter schools that, if pressured, could negatively impact the rating.
The schools continue to mature, with Ouchi, Skirball and O'Donovan having completed eight, seven and six years of audited financial statements, respectively in fiscal 2014. Moreover, the schools now have three charter renewals among them. Ouchi received its second five-year renewal in 2013, while Skirball's second renewal will come up in June 2016. The schools' renewal success to date is viewed favorably by Fitch, but still reflects their limited histories.
O'Donovan, the youngest of the three schools having just completed its sixth year of audited financial statements in fiscal 2014, was merged into Ouchi in the 2013-2014 school year to form a continuous 6-12 program on the two schools' shared campus. As such, O'Donovan's existing charter was collapsed and Ouchi's charter was revised to incorporate both schools and simultaneously renewed for a further five-year term effective June 2014 to June 2019.
Fitch continues to view Alliance's broader reputation and positive working relationship with its schools' authorizer (Los Angeles Unified School District) positively and partially mitigating charter renewal risk. The district continues to view Alliance as a strong charter operator and a partner within the district; the second largest in the country. The representative that Fitch spoke with at the district expressed no concerns at present that would pressure the schools' existing charter status and renewal prospects.
ENROLLMENT STABILITY SUPPORTS OPERATIONS
Enrollment at the schools remains stable. Combined enrollment at the three schools is presently about 1,475, about even with the prior year. Ouchi serves 575 students in grades 9-12, while Skirball and O'Donovan each serve 450 students in grades 6-8. Given Alliance's goal of maintaining small schools, each school remains at or near its desired capacity and enrollment is not anticipated to vary significantly year-over-year. This is viewed favorably by Fitch as no material enrollment growth is planned or needed for the schools to meet their financial obligations.
The schools' financial performance remains sound, with each having generated operating surpluses since inception, albeit based on relatively small revenue bases. Operating margins ranged between a healthy 5.6% and 16.5% for fiscal 2014, driven largely by prudent budgeting and administrative efficiencies derived through the Alliance network. The schools continue to benefit from the strong financial oversight and budgetary guidance provided by Alliance and stable enrollments which support consistent operating performance. Characteristic of charter schools, revenue diversity is limited with state aid comprising the majority (more than two-thirds) of funding and federal aid representing another 11%-13%. Alliance anticipates another positive operating result for fiscal 2015, which Fitch considers realistic based on enrollment stability, improved state funding, and the schools' conservative budgeting and operating track record.
State funding improved for a second straight year in fiscal 2015 after being held flat in fiscal 2013 and cut in fiscal years 2009-2012 (Fitch rates California GOs 'A', Outlook Stable). Fiscal 2015 per pupil funding increased substantially to $8,949 from $7,699 for Ouchi; to $7,622 from $6,694 for Skirball; and to $8,175 from $7,460 for O'Donovan. Improved funding was due in part to voter passage of the tax increase initiative, Proposition 30, in November 2012, which also led to a revision of the state's funding formula that benefited Alliance schools due to the mostly low income demographic that they serve.
HIGH, BUT MANAGEABLE DEBT BURDEN
On a combined basis, the schools' debt burden is high but remains manageable. Total pro forma MADS ($1.7 million) represented 11.3% of the schools' combined fiscal 2014 operating revenues of $15.3 million. The schools' positive operations enabled them to generate sufficient coverage of between 1.3x and 2.5x pro forma MADS over the past five fiscal years (2.2x in fiscal 2014). Debt to net income available for debt service was also a moderate 6x. In addition, Alliance's management fee, which totaled $1.1 million for the schools in fiscal 2014, is subordinate to debt service, providing an added layer of flexibility in the event operations weaken.
While joint and several, Fitch notes favorably that, on an individual basis, the schools continue to cover their allotted share of debt service on the series 2011A bonds. For fiscal 2014, coverage was 1.6x for Skirball and 2.6x for Ouchi and O'Donovan, whose financial statements were combined as a result of their merged charter during fiscal 2014.
Typical of charter schools, the schools' balance sheet resources are limited, though continue to grow. On a combined basis, available funds (cash and investments not permanently restricted) totaled $5.6 million as of June 30, 2014, and covered fiscal 2014 operating expenses ($13.3 million) and outstanding debt ($22.6 million) by 41.9% and 24.7%, respectively. While these liquidity metrics are typically considered low, they are adequate for the rating level and provide the schools with a modest financial cushion to manage any unexpected funding declines and/or expenditure increases.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Charter School Rating Criteria' (Sept. 19, 2012);
--'Fitch Affirms Alliance for College-Ready Public Schools, CA's Rev Bonds at 'BBB-'; Outlook Stable' (Jan. 29, 2014).
Applicable Criteria and Related Research:
Charter School Rating Criteria