CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded to 'B' from 'BB-' approximately $9.02 million of education revenue bonds series 2011A&B issued by the Beasley Higher Education Finance Corporation on behalf of FOCUS Learning Academy, TX (Focus).
The bonds remain on Rating Watch Negative.
The revenue bonds are secured by a pledge of Focus' gross revenues, a cash-funded debt service reserve and a mortgage on property and facilities.
KEY RATING DRIVERS
HEIGHTENED CHARTER REVOCATION RISK: The downgrade is driven by Focus' two consecutive years of state academic designations of 'Improvement Required (IR)'. This status significantly increases charter revocation risk, which Fitch would expect to result in closure of the school and default on the bonds. Under state law, the authorizer has no option but to revoke a charter if the IR designation is made for three consecutive years. The state denied the academy's appeal of its 2014 - 2015 academic year designation in November 2015. This risk outweighs all other credit factors at this time.
GROWING BUT CHALLENGED ENROLLMENT: Focus grew enrollment 22% in fall 2015, to around 1,149 students. Focus' enrollment also grew in fall 2014, and challenged facility capacity. New charter students that were not included in the 2014 - 2015 'IR' state accountability rating will be included in the 2015/2016 state rating, increasing the academic challenges.
FINANCIAL METRICS STABLE: Fiscal 2015 financial operations generated break-even operations, resulting in bond debt service coverage of 1.6x. When lease debt service is included, coverage is slimmer at 1.1x. Balance sheet metrics remain stable but very slim.
GOVERNANCE LACKS INDEPENDENCE: There has historically been overlap between Focus' board of directors and day to day administration, thereby weakening the independent oversight mechanism. Several key management personnel stepped down from board positions in calendar 2015, but retain prior management roles at the school.
CHARTER REVOCATION RISK: Should Focus Learning Academy not improve academic performance in the 2015/2016 academic year, and thereby trigger charter revocation by the state, the rating will be downgraded to reflect the expectation of bond default.
STANDARD SECTOR CONCERNS: A modest financial cushion, substantial reliance on state per pupil funding, and charter renewal risk are credit concerns common in all charter school transactions that, if pressured, could impact the rating over time.
Located in Dallas, TX, Focus is a K-12 charter school that received its first charter in 1998 and started with an initial enrollment of 177 students in grades K-6. The current charter extends to 2023.
Focus ended fiscal 2015 with 941 students, up from 844 at the end of fiscal 2014. Much of this increase came from mid-year transfers (about 57 high school students) from an area charter school that closed. However, management reports that these transfers resulted in significant administrative and academic stress during the 2014 - 2015 academic year. Enrollment for fiscal 2016 (fall 2015) was up 22% to 1,149 students; in mid-January 2016, it was 1,109, still an increase.
Due to fall 2015 enrollment increases, Focus entered into an $830,000 capital lease in June 2015 to provide 12 classrooms with three modular/temporary buildings. Those buildings are not expected to be completed until early 2016, and Focus management has temporarily converted its athletic center to an instructional center.
CHARTER REVOCATION RISK
The Texas Education Agency (TEA) assigned Focus an 'improvement required (IR)' accountability rating for two consecutive years, academic years 2013/2014 and 2014/2015. Under state law, the state must revoke a charter if, for three consecutive years either the IR designation is made or a charter does not meet financial standards.
TEA, Focus' authorizer, did not grant the school's appeal of its 2014/2015 academic year designation. This factor drives Fitch's rating downgrade, and the Negative Credit Watch status. Receipt of "IR" academic status for the current 2015/2016 academic year will, under state law, require TEA to revoke Focus' charter. Fitch understands there is a limited appeal process, but it is uncertain and has proven unsuccessful in the past. Fitch expects TEA academic results for the 2015/2016 academic year will be public by August, 2016.
Focus' operating revenues remain highly reliant on state per-pupil funding, as is the case with most charter schools. State funding was 87% of operating revenue in fiscal 2015.
Academy operations were stable for the fiscal year ended
Aug. 31, 2015, primarily due to expense controls and modest enrollment increases. The operating surplus was break-even, and resulted in 1.6x MADS debt service coverage, which met bond covenants (at least 1.1x is required).
Available funds (AF) were stable in fiscal 2015, but overall balance sheet reserves remain very slim. AF, as defined by Fitch, was $1.3 million at fiscal year-end 2015, still a weak 12% of operating expenses and 11.3% of outstanding bonds (about $10 million including capital leases). Fitch views these financial cushion ratios as low, and providing no cushion for bond-holders in the event of charter revocation.
Focus' ratio of long-term debt to net income available, which measures years of debt-financed cash flow, remained slim at 7.8x in fiscal 2015.
Focus' fiscal 2015 debt burden (MADS as a percent of operating revenue) of 8.6% is moderately high but more favorable than most Fitch-rated charter schools. Including capital lease debt service, the debt burden increases to a high 11%. Annual bond debt service obligations are approximately level through final maturity in 2041; the capital lease structure is level with a 10-year term.
Additional information is available at 'www.fitchratings.com'
Charter School Rating Criteria (pub. 05 Nov 2015)
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
Dodd-Frank Rating Information Disclosure Form