CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB' rating on $91.805 million outstanding California Statewide Communities Development Authority school facility revenue bonds series 2010, issued on behalf of Aspire Public Schools (the bonds).
The Rating Outlook is Stable.
The bonds are secured by rental payments made by Aspire Public Schools (Aspire) equal to debt service on the bonds from gross revenues of the 10 schools which received bond proceeds (the bond schools); a debt service reserve fund; deeds of trust on five of the 10 financed facilities; and partial credit enhancement through a $17 million letter of credit (LOC). The rating does not incorporate the partial credit enhancement from the LOC.
KEY RATING DRIVERS
STRONG OPERATIONAL/FINANCIAL MANAGEMENT: Fitch views Aspire's operating and financial management practices as strong. Academic performance for most of the bond schools is at or above state expectations, and in fiscal 2014 each of the 10 bond schools were at or close to break-even on a full accrual basis.
LIMITED OPERATING HISTORY: As of the 2014/2015 academic year, all of the 10 bond schools have been in operation for 5-12 years, and all have had at least one charter renewal. Two schools, however, only have 4 years of audited financial results, which under Fitch's charter school rating criteria, requires those schools to be excluded from debt service coverage calculations. For fiscal 2014, the exclusion was not material.
FINANCIAL METRICS REMAIN SPECULATIVE: Balance sheet metrics for the 10 bond schools and the consolidated Aspire organization improved in fiscal 2014, but remained very limited. However, maximum annual debt service coverage (MADS), as adjusted per Fitch's criteria, remains positive.
WEAK BALANCE SHEET AND LIMITED DIVERSITY: Weak balance sheet metrics for the bond schools - which largely come from consolidated Aspire operations, could create rating pressures longer-term. There is some philanthropic support which adds revenue diversity, although this is mostly at the consolidated Aspire level.
OPERATING PERFORMANCE: Weakened MADS coverage from the bond schools due to enrollment declines or state per pupil funding reductions could create rating pressures. This is not currently expected due to stable enrollment and solid demand.
STANDARD CHARTER RENEWAL RISK: 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 which, if pressured, could negatively impact the rating.
Aspire is a non-profit public-benefit corporation that operates 35 charter schools in California, and three in Tennessee. Of these, the 10 bond schools serve a mix of K-12 grades, and are located in various California communities. Series 2010 bond proceeds were used to finance or refinance charter school facilities. Gross revenues of those 10 California schools support debt service on the series 2010 educational school facility revenue bonds.
Effective for the 2013/2014 academic year, the bond schools began operating under charters with five different local school district authorizers. Fitch communicated with all five authorizers, who reported that the bond schools and Aspire were cooperative in their oversight process and in compliance with charter requirements. These authorizers reported no outstanding issues threatening the charters at this time.
POSITIVE ENROLLMENT AND DEMAND TRENDS
As of fall 2014, Aspire enrolled approximately 4,363 students at the 10 bond schools, an increase of 7% from fall 2013. The bond schools comprise about 32% of Aspire's total California charter school enrollment of 13,550. Management indicates that most of the bond schools are close to capacity. Demand for an Aspire education remains solid as evidenced by a fall 2014 waitlist for all Aspire schools in California exceeding 6,000, or about 47% of available seats.
STABLE ACADEMIC RESULTS
Positive academic results also drive student demand. In academic year 2012/2013, the most current performance data available, four bond schools failed to meet the state API growth target (Aspire Golden State, Aspire Langston Hughes, Aspire Twilight Secondary and Aspire Pacific Prep Academy), and were below the state-wide average. The other six bond schools reported API results well in excess of the state average and the state proficiency target. As a whole, Aspire's California schools' API average was well above state targets and averages.
Fitch is not concerned about the mixed academic performance at this time, as the various charter authorizers reported satisfactory management focus on achievement as well as incremental progress. Aspire allocates additional resources to schools with lower API scores.
All California schools, including charter schools, are transitioning to Common Core (CC) academic standards and testing in the 2014/2015 academic year. Under this transition, state academic scoring will change. Fitch notes that nationally, the CC transition, and evaluation of related test results, is expected to take several years. For the 2013/2014 academic year, California did not compute 'API' academic scores state-wide. Aspire's management reports that academic resources have been added to its charter schools as needed.
POSITIVE FINANCIAL PERFORMANCE
Per-pupil state funding remains the bond schools' primary revenue stream. For fiscal 2014, Fitch calculated a positive 11.5% operating margin for the ten bond schools based on unaudited consolidated financials provided by Aspire, which is considered strong. This compares to 9.2% in fiscal 2013 and 3.6% in fiscal 2012. Management attributes the positive operating performance to increased state per-pupil funding, conservative budgeting, and stable to growing enrollment.
State per-pupil funding has increased in recent years, up about 6.5% in fiscal 2014 for all Aspire schools, and 12% in the current fiscal 2015. These increases followed several years of funding declines. State per-pupil levels are not finalized for fiscal 2016, although management expects another increase.
In prior analyses, consistent with Fitch's charter school criteria, Fitch adjusted debt service coverage calculation to exclude any charter school with an operating history of less than five years. As of the 2014/2015 school year, only two of the 10 bond schools have not reported five full years of audited financial results: Aspire Alexander Twilight Secondary Academy, and Aspire Pacific College Preparatory Academy. When related net revenues from these two schools are excluded from Fitch's assessment of MADS coverage for the bond schools, adjusted fiscal 2014 coverage was not materially different from the 2.0x coverage for the 10 bond schools. This was consistent with an adjusted fiscal 2013 MADS coverage of 1.6x (and 1.8x for all bond schools).
HIGH DEBT BURDEN
MADS burden remains high for the ten bond schools. In fiscal 2014, MADS of $6.6 million was 15.3% of operating revenue, which while high, reflects moderation over time from 22% in fiscal 2011. TMADS for the consolidated Aspire operations is much more moderate at 8.1%. The series 2010 bonds are the only bonded debt for the bond schools; debt is structured as level fixed rate. Aspire's management reports no additional debt plans related to the bond schools.
SLIM BALANCE SHEET
Aspire's balance sheet cushion (defined as available funds [AF], or unrestricted cash and investments) at the end of fiscal 2014, improved on both a bond school and Aspire consolidated basis. Management attributes this to receipt of capital grants, multi-year funding for CC implementation, growth in average per pupil funding, enrollment growth and improvement in state funding deferrals. For consolidated Aspire, adjusted AF of $27.4 million (up from $8.9 million in fiscal 2013), improved but remained slim at 20.6% of expenses and 17% of debt ($119 million at June 30, 2014, including the $92.8 million series 2010 bonds).
For the 10 bond schools, AF increased to $10.8 million, from historical levels where there was essentially no AF recorded at the charter school level. AF ratios for the bond schools improved, but were still slim at 28% of expenses and 11.7% of debt. Management projects that liquidity levels at the end of fiscal 2015 will be similar to 2014, due to the reasons mentioned above.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Charter School Rating Criteria' (Sept. 19, 2012);
--'Fitch Downgrades Aspire Public Schools (CA) to 'BB''(March 08, 2013);
--'Fitch Affirms Aspire Public Schools, CA's Revs at 'BB'; Outlook Stable' (Feb 21, 2014).
Applicable Criteria and Related Research:
Charter School Rating Criteria