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Fitch Affirms American Charter Schools Foundation (AZ) at 'BB'Fitch Ratings affirms the 'BB' rating on approximately $72.6 million series 2007A bonds issued by the Pima County Industrial Development Authority, Arizona (PCIDA). The bonds were issued on behalf of the American Charter Schools Foundation (ACSF). The Rating Outlook is Stable. SECURITY The bonds are secured by a joint and several pledge of the revenues of 10 ACSF schools in Arizona (collectively, the bond schools), which primarily consist of state aid based on enrollment. The bonds are additionally secured by a debt service reserve (DSR). The schools also make annual renewal and replacement deposits. Charter payments from the state are made directly to the bond trustee. KEY RATING DRIVERS WEAK FINANCIAL PROFILE: The rating reflects a history of near break-even GAAP operations (fiscal 2015 margins were 2.2%), a very limited financial cushion, a high debt burden and adequate, albeit limited, coverage of transaction maximum annual debt service (TMADS). ACSF's financial profile has characteristics consistent with a speculative grade rating. ENROLLMENT ISSUES PERSIST: Aggregate enrollment at the 10 schools leveled out, falling 0.7% in fall 2015 (fiscal 2016), much less than the 12% decline in fall 2014 (fiscal 2015). Enrollment volatility is uneven among the 10 schools and the recent declines are a credit concern. However, the charter management organization (CMO) has a track-record of managing effectively through enrollment fluctuations, and fiscal 2015 operations were positive even with a large enrollment decline. STRUCTURAL BONDHOLDER PROVISIONS: Legal and structural security measures include a trustee intercept of state aid. This provides for payment of debt service before any pro-rata distribution of revenues to the schools, and contractual subordination of the CMO fee. RATING SENSITIVITIES MARGIN DETERIORATION: Should American Charter School Foundation's operating margin deteriorate, causing transactional maximum annual debt service coverage for the 10 bond schools to fall below 1x, or further weakening of already slim balance sheet resources, negative rating action is likely. ENROLLMENT AND RENEWAL PRESSURES: Failure to stabilize enrollment would negatively pressure the rating. Additionally, Fitch will monitor charter renewals for the 10 schools, all of which expire in 2017 or 2018. STANDARD SECTOR CONCERNS: 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 which, if pressured, could have a negative impact on the rating. CREDIT PROFILE ACSF is composed of 10 high schools, nine of which operate in the Phoenix, AZ metropolitan area. A tenth school operates in Tucson. Enrollment in fall 2015 was 3,772, down 0.7% from fall 2014, reflecting some stabilization from fall 2014 (enrollment of 3,800, down 12% from the year before). All of the 10 bond schools are alternative schools except for South Ridge High School. The schools maintain independent charters from the Arizona State Board of Charter Schools (ASBCS). Each charter has a 15-year term (which is standard in Arizona) and expires in 2017 or 2018. The schools currently remain in good standing under their charters, and ASBCS reports a positive working relationship with the operator. Seven of the schools' charters are up for renewal in 2017; the remaining three in 2018. The ACSF bond schools each have management agreements with the Leona Group, one of the larger CMOs in Arizona. At this time, Leona manages 58 charter schools nationwide, including 25 in Arizona, including the 10 bond schools. Leona maintains dual headquarters in Arizona and Michigan. ENROLLMENT STRESSES OPERATIONS Fall enrollment fell 0.7% in fall 2015, less than the 12% decline in fall 2014. The prior two academic years saw enrollment increase modestly. Fitch views enrollment volatility negatively, but notes that fiscal 2015 operations were positive even with the large fall 2014 enrollment dip. The CMO has a track-record of managing operations through nrollment volatility. Management reports continued focus on growing enrollment, and notes that most of the schools have available physical capacity. Enrollment volatility over time is reflected in the 'BB' rating. SLIM OPERATING PERFORMANCE The 'BB' rating reflects a financial profile that Fitch considers consistent with a non-investment-grade rating. ACSF's GAAP operating margin varies year to year. Margins were 2.2% for the fiscal year ending June 30, 2015, which compares to 4.1% in fiscal 2014, and negative 1.1% in fiscal 2013. Management projects fiscal 2016 operating results to be somewhat slimmer than fiscal 2015, but still balanced. The ACFS bond schools, as a group, have generated slim but positive TMADS coverage in each of the last six years. Fitch defines TMADS as maximum annual debt service excluding a balloon payment in the last maturity (typically funded from the DSR). TMADS coverage was 1.3x for fiscal 2015, compared to 1.4x for fiscal 2014, and 1.1x in 2013. The annual debt service coverage requirement is 1x; a higher coverage level is required for issuance of additional bonds. LIMITED BALANCE SHEET In addition to slim operating results, ACFS has a weak balance sheet; both factors limit operating flexibility. Available funds, defined as cash and investments not permanently restricted, was $2.1 million at the end of fiscal 2015, improved from $1.5 million in 2014 and $994,000 in 2013. Fiscal 2015 available funds still represented a very slim 6.9% of operating expenses ($30.5 million) and 2.9% of outstanding debt (about $73 million). HIGH DEBT BURDEN ACSF has a high debt burden, which is typical of the sector. TMADS of $5.6 million (in 2038) represented 17.9% of fiscal 2015 operating revenues, comparable to recent years. No additional debt is planned for the ACSF bond schools at this time. ACADEMIC PERFORMANCE All Arizona schools, including charter schools, transitioned to Common Core (CC) academic standards and testing in the 2014/2015 academic year. This transition means that 2014/2015 academic test results are not comparable to those of prior years, and the state is still developing a rating scale for Arizona schools. For the 2013/2014 academic year, seven of the schools met the ASBCS dashboard expectations, and three did not. The academic performance of the 10 schools varied widely; two received the highest 'A' designation, four received a 'B', and four received a 'C'. During the 2012/2013 academic year, all 10 schools met the state's academic expectations. For the 2014/2015 academic year, test results are expected to be posted publicly, but school letter grades will not be assigned. Fitch understands that 2014/2015 test results will not drive the authorizer renewal process. Seven of the 10 ACSF bond schools have charter expirations in 2017, and for five of those schools renewal is not expected to be an issue due to meeting ASBCS dashboard requirements in 2013/2014. For the other two 2017 renewal schools, ACSF reports that they have provided academic progress data to ASBCS. Given the timing of ASCSF charter renewals, the lack of comparable academic results, and the importance of academic performance historically in that process, there is uncertainty in the 2017 renewal process. Additional information is available at 'www.fitchratings.com' Applicable Criteria Charter School Rating Criteria (pub. 05 Nov 2015) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=872774 Revenue-Supported Rating Criteria (pub. 16 Jun 2014) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998269 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998269 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 (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. View source version on businesswire.com: http://www.businesswire.com/news/home/20160122005965/en/ |
