[February 21, 2014]

Fitch Affirms Aspire Public Schools, CA's Revs at 'BB'; Outlook Stable

Fitch Ratings has affirmed the 'BB' rating on $93.3 million California Statewide Communities Development Authority school facility revenue bonds, series 2010, issued on behalf of Aspire Public Schools (the bonds).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by rental payments made by Aspire Public Schools (Aspire) equal to debt service on the bonds from gross revenues of the 10 schools which received bond proceeds (the bond schools); a debt service reserve fund; deeds of trust on five of the 10 financed facilities; and partial credit enhancement through a $17 million letter of credit (LOC). The rating does not incorporate the partial credit enhancement from the LOC.

KEY RATING DRIVERS

STRONG OPERATIONAL/FINANCIAL MANAGEMENT: Fitch views Aspire's operational and financial management practices as strong. Academic performance for most of the bond schools is at or above state expectations, and in fiscal 2013 each school generated a modest operating surplus on a full accrual basis.

LIMITED OPERATING HISTORY: Four of the 10 bond schools have been in operation less than five years, and one has not gone through its first charter renewal process. Under Fitch's charter school rating criteria, this precludes those schools from being included in debt service coverage calculations.

FINANCIAL METRICS REMAIN SPECULATIVE: Despite effective leadership and policies, balance sheet metrics for the 10 bond schools and the consolidated Aspire organization remain very limited. Transaction maximum annual debt service coverage (TMADS), as adjusted per Fitch's criteria, was positive.

RATING SENSITIVITIES

WEAK BALANCE SHEET AND LIMITED DIVERSITY: Weak balance sheet strength for the bond schools - which largely comes from consolidated Aspire operations, could create rating pressures. There is some philanthropic support which adds revenue diversity, although this is mostly at the consolidated Aspire level.

OPERATING PERFORMANCE: Weakened TMADS coverage from the bond schools due to enrollment declines or state per pupil funding reductions could create rating pressures.

STANDARD CHARTER RENEWAL RISK: A limited financial cushion; substantial reliance on enrollment-driven, per-pupil funding; and charter renewal risk are credit concerns common in all charter school transactions which, if pressured, could negatively impact the rating over time.

CREDIT PROFILE

Aspire is a non-profit public-benefit corporation that operates 37 charter schools, mainly in California. Of these, the 10 bond schools serve a mix of K-12 grades, and are located in various California communities. Series 2010 bond proceeds were used to finance or refinance charter school facilities. Gross revenues of 10 of those schools, all in California, support debt service on the series 2010 educational school facility revenue bonds.

In response to a 2012 decision by the Alameda County Superior Court regarding its statewide benefit charters, Aspire obtained local school district charters for the six schools formerly authorized as state-wide benefit charters. Those local charters are in place as of the 2013/2014 academic year. Fitch considers the prior litigation risk resolved.

POSITIVE ENROLLMENT AND DEMAND TRENDS

As of fall 2013, Aspire enrolled approximately 4,073 students at the 10 bond schools, an annual increase of about 2%. As in the past several years, this pace exceeds Aspire's base-cse forecast for the bond schools. Demand for an Aspire education remains robust, as evidenced by waitlists at the bond schools exceeding 3,300 in fall 2013 (fiscal 2014).

Positive academic results also drive student demand. In academic year 2012/2013, four schools failed to meet the state API growth target (Aspire Golden State, Aspire Langston Hughes (News - Alert), Aspire Twilight Secondary and Aspire Pacific Prep Academy), and were below the state-wide average. The other six bond schools reported API results well in excess of the state average and the state proficiency target. As a whole, Aspire's California schools' API average was well above state targets and averages. Fitch is not concerned about the mixed academic performance at this time, as the various charter authorizers reported satisfactory management focus on achievement as well as incremental progress. Aspire allocates additional resources to schools with lower API scores.

IMPROVING FINANCIAL PERFORMANCE

State funding, tied primarily to enrollment, remains the bond schools' primary revenue stream. For fiscal 2013, Fitch calculated a positive 9.2% operating margin for the bond schools based on unaudited consolidated financials provided by Aspire. This compares to 3.6% in fiscal 2012. Management attributes the stronger operating performance to increased state per-pupil funding, conservative budgeting, and stable to growing enrollment.

Under Fitch's charter school criteria, Fitch adjusts the debt service coverage calculation to exclude any charter school that has an operating history of less than five years. Such schools are deemed speculative grade under this criteria. Four of the 10 bond schools (Aspire Alexander Twilight Prep, Aspire Alexander Twilight Secondary, Aspire Pacific, and Aspire Titan) currently meet that definition. When related net revenues from these four schools are excluded from Fitch's assessment of TMADS coverage for the bond schools, adjusted fiscal 2013 coverage was still 1.6x (it was 1.8x with all 10 bond schools).

HIGH DEBT BURDEN

On a consolidated basis, TMADS burden remains high. In fiscal 2013, TMADS of $6.6 million was 16.9% of bond school revenues, which is a speculative-grade attribute based on Fitch's rating criteria. The series 2010 bonds are the only outstanding debt for the bond schools, and Aspire management reports no plans for additional debt related to those schools.

SLIM BALANCE SHEET

Aspire's balance sheet cushion (defined as available funds [AF], or unrestricted cash and investments) at the end of fiscal 2013, on both a bond school and Aspire consolidated basis, remains very light. There was essentially no AF recorded at the charter school level, and $19.7 million at the Aspire consolidated level. Fitch adjusted consolidated cash and investments for restricted funds, with a resulting available funds amount of $8.9 million (up from an adjusted $3.2 million in 2012). For consolidated Aspire, adjusted available funds remain at extremely modest levels of 7.7% of expenses and 5.7% of debt (including the series 2010 bonds).

Proposition 30 revenues led to per-pupil funding improvement in fiscal 2013. While this supported stronger TMADs coverage levels, Fitch expects increases in reserves to be relatively modest. Liquidity risk remains a credit concern, as is the case for nearly all Fitch-rated charter schools.

STANDARD CHARTER SCHOOL RISK FACTORS

Effective for the 2013/2014 academic year, the bond schools now operate under charters with five different local school district authorizers. Fitch communicated with all five authorizers, who reported that the bond schools and Aspire were cooperative in their oversight process and in compliance with charter requirements. These authorizers reported no outstanding issues threatening the charters at this time.

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

Applicable Criteria and Related Research:

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

-- Fitch Downgrades Aspire Public Schools (CA (News - Alert)) to 'BB'; March 08, 2013.

Applicable Criteria and Related Research:

Charter School Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821314

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 (News - Alert) 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.

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