Fitch Affirms American Academy (CO) Revs at 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'BBB' rating on approximately $16.3 million in outstanding charter school revenue bonds, series 2008, for the Colorado Educational and Cultural Facilities Authority. The bonds are issued on behalf of the American Academy Project (AA, or the school).

The Rating Outlook is Stable.

SECURITY

The series 2008 bonds are payable from annual lease payments made by AA to the American Academy Foundation, subject to annual appropriation by the school and is secured by a first-mortgage lien over AA's Castle Pines campus (CP). The revenues from the school's operation of the Castle Pines facility are not pledged for the repayment of the bonds issued for the new Parker campus facility, and vice versa. A segregated cash-funded debt service reserve provides additional bondholder protection.

KEY RATING DRIVERS

STATE MORAL OBLIGATION: The 'BBB' rating is based on AA's inclusion in the state of Colorado's charter school moral obligation program (the program), which provides a mechanism for the state to restore draws on AA's debt service reserve fund.

STRONG STRUCTURAL and LEGAL PROVISIONS: Structural and legal provisions providing strong bondholder protection include the state's debt service intercept program and various reserve funds, reflecting a favorable statutory environment for charter schools.

FAVORABLE OPERATING ENVIRONMENT: AA enjoys a supportive and productive relationship with the charter authorizer, Douglas County School District #1 (Fitch rated 'AA+'), academic performance consistently superior to district and state averages, and strong demand guided by a seasoned management team, with a strong waitlist of over 2.5x and 99% retention.

STATE FUNDING STABILIZATION: AA is heavily reliant on state-funded per pupil revenue, but previously declining funding levels have begun to improve. Sound management practices tempered prior year funding reductions and enabled general operational stability.

WEAK FINANCIAL AND DEBT MEASURES: AA's GAAP-based operating margin for CP was positive in fiscal 2014 after negative margins the past two years. However, debt burden and debt service coverage remain inconsistent with Fitch-rated financial metrics for high-performing charter schools. Though secured separately, AA's new campus in Parker, CO further pressures the charter school's overall debt levels, as the campus carries significant debt (approximately $19 million) that is due in December 2017. The inability to refinance this debt could put credit pressure on the consolidated entity.

ADDITIONAL CAMPUS SHARES CHARTER: AA's Parker, CO campus shares the same charter as CP. Fitch acknowledges the financial segregation of pledged funds servicing the associated debt; however, academic and financial performance of the Parker school influences the charter status for AA as a whole.

RATING SENSITIVITIES

INCREASED CHARTER RENEWAL RISK: AA added an additional campus to its charter for fall of 2013. While CP has sufficient operating history, the new Parker campus lacks an operating history, and substandard performance could influence the charter renewal which affects both campuses.

STANDARD SECTOR CONCERNS: A limited financial cushion, substantial reliance on enrollment-driven and per pupil funding are credit concerns common among all charter school transactions which if pressured, could negatively impact the rating over time.

CREDIT PROFILE

STATE MORAL OBLIGATION PROGRAM

Under CO's moral obligation program, if a charter school draws on its debt service reserve fund and fails to replenish it immediately, the authority shall submit a certificate to the governor certifying the amount necessary to restore the reserve fund to its requirement. The governor shall then submit a request for appropriations to the legislature in an amount sufficient to restore the reserve fund. The general assembly then, at its discretion, may appropriate to restore the reserve fund.

In order to qualify for the program, a school must merit an investment grade credit profile at the time of bond issuance, and participate in the Colorado Charter School Intercept Program. Under the intercept program, the state treasurer pays a portion of AA's monthly per pupil revenue distribution directly to the trustee in amounts sufficient to pay debt service requirements.

The rating builds upon Fitch's view of the underlying credit quality of the charter school (bottom-up analytic approach). Moral obligation program bonds are secured separately by each school. Fitch views each bond as project-specific. The state is actively engaged in debt issuances under the moral obligation program, and the statute provides clear mechanisms to trigger the state's moral obligation. In addition to the moral obligation, the statute also provide an additional backstop (the state charter school debt service reserve fund, or CSDSRF) so that an additional appropriation due to a debt service reserve drawdown is less likely to be necessary.

NEW CAMPUS DEBT LEVELS DAUNTING

The CP campus opened in 2005; AA opened the second campus in Parker, CO, in fall 2013. The new campus is now in its second year of operation and enrolled 833 students in fall 2014, compared to 665 students in its inaugural year. The two field a waitlist that underscores demand for the AA brand and instructional programs.

As Fitch noted in its prior review, the second campus bears long-term debt of $20 million, issued in December 2012, payable solely by the Parker campus operations and associated balance sheet resources. The campus business and proprietary funds are not commingled and governmental funds for either campus cannot be utilized to subsidize the other. This separation of funds is viewed favorably as the Fitch-rated series 2008 bonds are supported by CP operations, initiated in 2005.

Of the $20 million owed by the Parker campus, nearly $19.7 million is due by 2017 and AA expects to refund the debt prior to that time. In Fitch's view, an inability to refinance the debt would pose liquidity depletion and increased default risk if not managed proactively. While the Parker campus series 2012 bonds are also covered under the CO moral obligation program and secured by a reserve fully funded at maximum annual debt service (MADS), the final maturity payment in 2017 would not be considered regularly scheduled debt service and therefore not covered by the moral obligation. Fitch notes the distinction between pledged revenue for debt repayment between the campuses; however, it is highly likely that fiscal distress, whether operationally or debt driven, for the Parker campus could influence the rating on the series 2008 bonds.

THIN LIQUIDITY LIMITS OPERATING CUSHION

AA's cash surpluses, slightly increased from fiscal 2013, maintain available funds of $1.65 million as of fiscal 2014. While relatively modest to investment-grade rated peers, AA's financial cushion consists of 23.1% of operating expenses and 10.1% of long-term debt and offers limited operating flexibility for the school.

Long-term debt of $16.3 million corresponds to transaction MADS (TMADS) of $1.44 million, which consumes a relatively high 19.9% of unrestricted operating revenue. TMADS coverage from fiscal 2014 net available income from operations equaled about 1.2x. As per Fitch's charter school criteria, debt burdens in excess of 15% combined with a generally inconsistent track record of GAAP-based operating surpluses is indicative of speculative grade credits.

STATE FUNDING LEVELS STABILIZE

Per pupil revenues (PPR) are AA's primary funding source at 74.8% of revenues. Despite, modest improvement in state funding over the last two years, PPR for CP alone was flat in fiscal 2014 from the prior year reflecting the campus' full capacity. Combined, PPR grew a significant 74% to about $9.3 million in fiscal 2014 due to the increase in student count created by opening the Parker campus in fall 2013. Favorably, state per pupil aid is up 5.4% in fiscal 2015.

Stable PPR funding and AA's ability to effectively manage expenses resulted in margin improvement in fiscal 2014, with the CP campus posting a surplus of 1.3% versus negative 5.7% for fiscal 2013. Fitch notes that AA's budgeting practices are conservative but that financially high performing charters within the rated portfolio present positive margins on a consistent basis.

AA also receives property tax revenue generated by a mill levy override approved by district voters. AA's FY2014 receipt of mill levy override revenues for CP totaled $476 thousand, compared to $501 thousand in FY2013. The mill levy override was phased in for fiscal 2011 and will sunset in 2020. Charter school enrollment within the district continues to grow, which would reduce tax receipts allocable to each student going forward.

ACADEMIC SUCCESS DRIVES DEMAND

AA's CP operations are at full capacity with fall 2014 enrollment of 920 students. The Parker campus enrolled 833 students in its second year of operations with the addition of the middle school's seventh grade class, compared to 655 in its inaugural year, which served kindergarten through sixth grade. Parker is expected to grow to 896 in the upcoming year with the addition of its eighth grade class. At capacity, the Parker campus' student count is expected to be the same as the CP campus.

Combined, AA realized student growth of 68%; an increase from 921 students served in fiscal 2013 to 1,549 students served in fiscal 2014. AA grew an additional 13% in fall 2014 to a combined 1,753 students. Both campuses are supported by a robust waitlist of about 3,036 students, 81%, or 2,458 of which will be school-age next year.

Demand for AA results from a track record of academic success measured by the Colorado Student Assessment Program (CSAP). Since inception (2005), AA students have outperformed both Douglas County School District and statewide averages across multiple grades in reading, writing, math and science proficiency examinations. This is particularly notable as the district's traditional schools typically rank as one of the highest performing in the state.

EXPERIENCED MANAGEMENT BENEFITS SCHOOL

AA is governed by an independent board of directors who oversee an experienced management team comprising proactive and focused individuals, some of whom participated in the founding of the school in 2005. Management's consistent focus on academic achievement, prudent stewardship of school resources in a stressed funding environment, compliance with all applicable charter covenants, and maintenance of a productive relationship with the charter authorizer are viewed favorably by Fitch.

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

Applicable Criteria and Related Research:

--'Fitch Publishes Rating Guidelines for Moral Obligations' (April 18, 2013);

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

--'Fitch Affirms American Academy (CO) Revs at 'BBB' (March 2014).

Applicable Criteria and Related Research:

Charter School Rating Criteria

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

Rating Guidelines for Moral Obligations

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704882

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980342

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Contacts

Fitch Ratings
Primary Analyst
Nancy Faingar Moore
Director
+1 212-908-0725
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Colin Walsh
Director
+1 212-908-0767
or
Tertiary Analyst
Marcy Block
Senior Director
+1 212-908-0239
or
Committee Chairperson
Laura Porter
Managing Director
+1 212-908-0575
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Nancy Faingar Moore
Director
+1 212-908-0725
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Colin Walsh
Director
+1 212-908-0767
or
Tertiary Analyst
Marcy Block
Senior Director
+1 212-908-0239
or
Committee Chairperson
Laura Porter
Managing Director
+1 212-908-0575
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com