NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' rating on approximately $12.3 million of series 2010 bonds (Pinnacle Charter School, Inc. High School Project) issued by the Colorado Educational and Cultural Facilities Authority on behalf of Pinnacle Charter School (Pinnacle).
The Rating Outlook is Stable.
The series 2010 bonds are payable from annual lease payments made by Pinnacle, subject to annual appropriation by the school, and secured by a first mortgage over the financed facilities related to the high school. The bonds are not on parity with Pinnacle's series 2013 bonds (not rated by Fitch).
KEY RATING DRIVERS
STATE MORAL OBLIGATION: The 'BBB' rating is based on Pinnacle'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 the school's debt service reserve fund.
SOUND OPERATING PROFILE: Pinnacle's credit profile reflects a long 17-year operating history, with multiple charter renewals and enrollment growth; a track-record of positive GAAP-based operating performance and healthy debt service coverage which partially offsets a high debt burden; and an adequate level of unencumbered reserves to help counter short-term financial difficulties.
ACADEMICS CHALLENGES: Overall student proficiency across the elementary, middle, and high schools is mixed, with the high school proficiency improving, the middle school remaining steady and the elementary school's proficiency declining in school year 2013-14, requiring it to submit an action plan for priority improvement. Operating under one charter, it is uncertain if the academic performance of the elementary school will impact the term of the charter for Pinnacle as a whole at the next renewal in 2016. Concern is offset somewhat by the financial segregation of pledged funds servicing the associated debt.
STRUCTURAL and LEGAL PROTECTIONS: Structural and legal provisions providing bondholder protections include the state's debt service intercept program and various reserve funds, reflecting a favorable statutory environment for charter schools.
INCREASED CHARTER RENEWAL RISK: Pinnacle has sufficient operating history; however, the elementary school's substandard performance could influence the charter term at renewal.
STANDARD SECTOR CONCERNS: A modest financial cushion; substantial reliance on enrollment-driven, per pupil funding; and charter renewal risk are credit concerns common among all charter school transactions which, if pressured, could negatively impact the rating.
Pinnacle, which is located in Federal Heights (10 miles north of Denver), received its initial charter from Adams County School District No. 12 in 1997 and underwent a successful renewal in 2000. In 2006, Pinnacle left the district to join the Colorado Charter School Institute, a statewide charter-granting agency. The school's charter is subject to renewal every five years. The charter was successfully renewed in June 2011 and the next renewal date is June 2016. The elementary, middle and high schools all operate under a single charter. While the series 2010 bonds are solely secured by the operations of the high school facility, Fitch's analysis incorporates the operational and financial health of Pinnacle's K-8 facility given the strong operational linkage across all three schools.
STATE MORAL OBLIGATION PROGRAM
Under the 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 the school'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, and 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 draw down is less likely to be necessary.
PRESSURED ACADEMIC PERFORMANCE
Like other public schools in the state, Pinnacle is assigned a State performance indicator, which is used to evaluate academic performance relative to state expectations. Student proficiency at the high school level improved in school year 2013-14 and continues to exceed the Colorado Department of Education (CDE) school performance framework indicators, while proficiency at the middle and elementary school was rated as not meeting, but approaching, the framework's performance indicators for the same year. Based on this framework, the CDE classified both the middle and the elementary school as improvement schools and the high school as a performance school. The CDE will defer to a district rating the school, in this case the authorizer Charter School Institute (CSI). CSI has recommended that Pinnacle elementary school be placed one level lower that the plan type under the CDE framework and designated it as Priority Improvement based on student performance trend data. For a priority improvement level school, submission of a unified improvement plan (UIP) for the 2014-2015 school year is required and the school is placed on a five-year time clock to show improvement in student performance. The elementary school clock starts June 2015.
The school's action plan is reviewed by CSI, CDE and members of the state review panel, who are appointed by the state commissioner of education and deemed experts on improvement by the state. A decision on whether or not to keep a school open is up to the authorizer, CSI.
As part of its review, Fitch spoke with CSI who noted that present levels of academic performance when looking at Pinnacle as a whole may only impact the period or term of the upcoming renewal. As a result, Fitch does not believe that Pinnacle's charter application is currently at risk for non-renewal. Furthermore, CSI noted that the remaining areas used for charter evaluation purposes - financial and compliance - remain sound. Given the importance of academic performance in the authorizer's overall evaluation of Pinnacle's charter standing, Fitch will continue to monitor this aspect of the credit.
Pinnacle's pressured academic performance as a whole can be attributed to changes in the student composition of the school over the last several years. Newer students continue to score below returning students indicating Pinnacle has a positive impact on continuously enrolled students. Pinnacle continues to underperform both the district and state based on 2014 TCAP results, except at the high school level.
Management believes they are at a disadvantage, since CSI's ratings do not compare academic data to other districts served by Pinnacle. Only half of Pinnacle's students come from within the Adams 12 district geographic area which is what the CSI ratings are based on, while a significant 22% come from Westminster 50, 14% from Mapleton, 6% from Adams 14, and 8% from other districts. Fitch recognizes that the comparison schools outside the district are not included in the performance standards and that Pinnacle compares favorably to these nearby schools.
Management is implementing several improvement strategies based on compiled reporting data and is planning a reduction in enrollment for AY 2015-2016 and a target reduction in class size which is expected to better support students experiencing academic difficulties. In an effort to transition to a more technology-based curriculum, management has rolled out a major technology initiative, with Ipads deployed to all students to improve student outcomes on upcoming computer-based exams.
DEMAND SUPPORTS ANNUAL OPERATING PERFORMANCE
Pinnacle's K-8 enrollment remained steady at full capacity for the 2014-2015 school year (total headcount enrollment of 1,603 from 1,589). Demand for the high school, capacity for which was enhanced with the series 2010 bond issue, stayed healthy as well, evidenced by a total headcount growth of 4.8% above the prior year, to 560. Pinnacle maintains a sizable waiting list, reflecting strong demand.
Favorable enrollment trends have enabled the school to generate an operating surplus in each of the past five fiscal years, including a 5.1% GAAP-based operating margin in fiscal 2014. Fitch interprets these results as evidence of management's ability to effectively plan for and (when necessary) implement budgetary adjustments to deliver healthy financial results. As is typical of charter schools, Pinnacle's primary funding source is per pupil revenue (PPR; 84% of fiscal 2014 operating revenues). Following several years of either cuts or flat funding, PPR increased by approximately 2.3% for fiscal 2014 and 6.12% for fiscal 2015.
According to management, operating results for fiscal 2015 are expected to be similar to fiscal 2014. Although projected total enrollment for fall 2015 is about 2,086, management expects about a $500,000 loss from a planned drop in student count in fall 2015; this should be adequately offset by an estimated 6%-7% or $780,000 increase in PPR in fiscal 2016.
LIMITED LIQUIDITY AND HIGH DEBT BURDEN
Pinnacle's balance sheet resources, provide only a limited financial cushion. As of June 30, 2014, available funds, defined by Fitch as cash and investments not permanently restricted, totaled $5.8 million, representing 38% and 19% of operating expenses and total debt, respectively. These ratios are low, although above many other Fitch-rated charter schools.
Pro forma MADS of about $2.24 million represented a high 13.7% of fiscal 2014 operating revenues of about $16.3 million. The high burden is partially offset by Pinnacle's ability to cover TMADS from operations. Coverage has been healthy, ranging from 1.2x-1.5x over the past five years (2010-2014); 1.3x in FY14.
Typical of many charter school financings, Pinnacle's debt amortization schedule includes a large final-year bullet maturity for both the series 2010 and series 2013 bonds, which the school intends to partially pay with the debt service reserve funds.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Rating Guidelines for Moral 'Charter School Rating Criteria' (Sept. 19, 2012);
--'Rating Guidelines for Moral Obligations' (April 18, 2013);
-- Fitch Affirms Pinnacle Charter School CO's 2010 Bonds at 'BBB'; Outlook Stable (March 5, 2014).
Applicable Criteria and Related Research:
Rating Guidelines for Moral Obligations
Charter School Rating Criteria