CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded to 'CCC' from 'B' approximately $9 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 are removed from Rating Watch Negative.
SECURITY
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' three 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 school is in the process of appealing its 2015/2016 academic status, the third such successive designation. The school is expected to operate during the 2016/2017 academic year, during the appeal process. Revocation 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 students that were not included in the 2014/2015 IR state accountability rating will be included in the 2015/2016 state rating, potentially increasing academic challenges. Enrollment for fall 2016 is projected to be similar to fall 2015.
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. Nine-month interim results for the fiscal year ending Aug. 31, 2016 indicate operations will be similar to fiscal 2015.
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.
RATING SENSITIVITIES
CHARTER REVOCATION RISK: Should Focus Learning Academy's appeal of its 2015/2016 academic performance not succeed, and thereby trigger charter revocation by the state, the rating will be further downgraded to reflect the expectation of bond default. Should the appeal be granted, and other credit factors remain positive, there may be upward rating potential.
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.
CREDIT PROFILE
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 2016 with 1,089 students, up from 941 students at the end of 2015, and 844 at 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 is projected for fall 2016 at 1,050.
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 were completed in early 2016.
CHARTER REVOCATION RISK
The Texas Education Agency (TEA) assigned Focus an IR accountability rating for three consecutive years, academic years 2013/2014, 2014/2015, and 2015/2016. 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.
School management plans to appeal the 2015/2016 academic designation, and operate during the 2016/2017 academic year while the appeal is processed. TEA, Focus' authorizer, did not grant the school's appeal of its 2014/2015 academic year designation. Fitch's rating downgrades are driven by Focus' third consecutive IR academic year designation, and heightened uncertainty regarding the charter status after the 2016/2017 academic year.
If the IR academic status for the 2015/2016 academic year is sustained through the appeal process, TEA is required under state law to revoke Focus' charter. Fitch understands that the Texas charter law is very prescriptive with little administrative flexibility, and the outcome of the appeal process remains uncertain. Fitch expects Focus to operate during the 2016/2017 academic year, during the appeal process. Fitch understands that TEA could, but typically does not revoke a charter during an academic year.
Additional information is available at 'www.fitchratings.com.'
Applicable Criteria
Charter School Rating Criteria (pub. 05 Nov 2015)
https://www.fitchratings.com/site/re/872774
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010801
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010801
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.