Fitch Affirms Green Dot Public Schools, Animo Inglewood Charter High School (CA) at 'BBB-'

NEW YORK--()--Fitch Ratings has affirmed the 'BBB-' rating on approximately $7.8 million of California Statewide Communities Development Authority charter school revenue bonds issued on behalf of the Green Dot Public Schools California (GDPSC), Animo Inglewood Charter High School (AI).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by pledged revenues of AI, including local control funding formula funds from the state of California (IDR 'AA-'/Outlook Stable). Additional security provisions include a cash-funded reserve equal to maximum annual debt service (MADS).

KEY RATING DRIVERS

SOUND FINANCIAL OPERATIONS: The 'BBB-' rating reflects AI's sound operating results and debt service coverage due to stable enrollment, increasing per-pupil funding, and good expense management through GDPSC. AI has ample student demand and some flexibility to enroll additional students.

ESTABLISHED OPERATING HISTORY: AI has a fairly long operating history and multiple charter renewals. In 2015, AI received its third charter renewal for a full term of five years, reflecting consistently strong academic results exceeding district and state averages. AI is operated by Green Dot Public Schools, which manages 21 schools in California.

STRUCTURE LIMITS LIQUIDITY: Liquidity held at AI is minimal, as funds and transactions are handled on its behalf by GDPSC. Bond covenants require a fund balance at AI of only 5% of the prior year's operating expenses. However, limited liquidity is partially mitigated by AI's consistently strong operating results and strong support and oversight from GDPSC.

RATING SENSITIVITIES

STANDARD CHARTER RISKS: A limited financial cushion; substantial reliance on enrollment-driven, per pupil funding; and charter renewal risk are credit concerns common among all charter school transactions that, if pressured, could negatively affect Animo Inglewood Charter High School's rating.

CREDIT PROFILE

Animo Inglewood is a charter high school located in Inglewood, CA. Certified in 2001 and initiating operations in 2002 with 140 freshman students, AI has received three charter renewals since creation, most recently in 2015 for a full five-year term. Fitch was unable to speak with AI's authorizer, the Inglewood Unified School District, prior to publication. However, AI's recent renewal and strong academic track record partially offset charter renewal risk.

GDPS serves over 11,000 students across a network of 26 schools. Most schools are in CA, in the greater Los Angeles area, but GDPS now operates schools in TN and WA. In exchange for a shared services fee, AI enjoys access to GDPSC's favorable vendor contracts, academic and financial management support, and fundraising capabilities.

STRONG ACADEMICS AND DEMAND

AI has strong academic results which drive sound demand and enrollment. AI's results on state-wide tests in spring 2016 exceeded district averages by a wide margin and also exceed state averages. AI is fully enrolled within its target enrollment of 550-650, with 636 students as of Oct. 5, 2016, and maintains a large and up-to-date waitlist. Fitch views AI's strong demand as sources of financial flexibility; if necessary, AI could draw additional students and thereby increase its revenue.

CONSISTENTLY POSITIVE OPERATING MARGINS

AI generates sound operating margins and coverage of debt service due to stable enrollment, increasing per-pupil funding, and good expense management through GDPSC. Operating margins averaged 9.8% from fiscal years 2011 to 2015, and preliminary 2016 results are stronger due to higher-than-expected enrollment. These figures include expense for the shared services fee paid to GDPSC, which is technically subordinate to debt service. AI's operating strength and flexibility mitigate its high reliance (consistently over 70%) on per pupil funding, which is typical of charter schools.

HIGH BUT MANAGEABLE DEBT BURDEN

The school's debt burden is high, with MADS consuming 10% of fiscal 2015 operating revenues. This level is moderating over time and is stronger than Fitch's minimum expectation of a MADS burden of 15% or less for investment-grade charter schools. AI's high debt burden is also manageable in light of cash flow. Coverage of MADS from operations was sound at 1.8x in fiscal 2015, well above Fitch's baseline expectation of at least 1.0x MADS coverage for investment-grade charter schools. Excluding the subordinate shared services fee, fiscal 2015 coverage would have exceeded 3x. There are no significant capital or debt plans related to Animo Inglewood at this time.

LIMITED LIQUIDITY

All material cash and investments balances are held at GDPSC and are not reflected in AI's financials. GDPSC is required to maintain a minimum unrestricted fund balance at AI equal to 5% of AI's operating expenditures in the previous fiscal year, pursuant to a net asset covenant in the bond indenture. Using this as a proxy for legally available funds, AI's balance sheet resources represent a very low 3.6% of net outstanding debt. However, limited liquidity is mitigated by consistently strong operating results and oversight by GDPSC.

Further mitigating weak liquidity, AI reports a $2.2 million intracompany receivable, primarily its cash held at GDPSC. However, this cash is not segregated or pledged to bondholders. In addition, GDPSC management affirms that it would support AI, or any of its managed schools, to the extent possible if they encountered financial stress.

Fitch believes that GDPSC's adequate resource base and operational support could help offset AI's limited liquidity in a downside scenario. However, Fitch's rating does not assume any support from GDPSC; GDPSC resources are not pledged for payment of the bonds and are potentially subject to liquidation in support of other schools or projects.

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

Applicable Criteria

Charter School Rating Criteria (pub. 04 Nov 2016)

https://www.fitchratings.com/site/re/889812

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=1015701

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015701

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Tipper Austin
Analyst
+1-212-908-9199
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Margaret Johnson
Director
+1-212-908-0545
or
Committee Chairperson
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Tipper Austin
Analyst
+1-212-908-9199
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Margaret Johnson
Director
+1-212-908-0545
or
Committee Chairperson
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com