|[March 08, 2013]
Fitch Downgrades Renaissance Charter School's (FL) 2010 Revs to 'BB+'
NEW YORK --(Business Wire)--
Fitch Ratings has downgraded to 'BB+' from 'BBB' and removed from Rating
Watch Negative the rating on approximately $68 million in outstanding
revenue bonds, series 2010 A/B, for the Florida Development Finance
Corporation (FDFC). The bonds are issued on behalf of Renaissance
Charter School, Inc. (RCS):
The Rating Outlook is Stable.
--Unrestricted revenues of the Financed Schools (defined below);
--A cash-funded debt service reserve fund;
--A partial debt service guarantee from Charter Schools USA (CSUSA);
--First liens on four of the financed facilities and a leasehold
interest in the fifth.
The Financed Schools are: Renaissance Elementary Charter School,
Renaissance Charter School of St. Lucie, Duval Charter School at
Arlington, North Broward Academy of Excellence, North Broward Academy of
Excellence Middle School (both at the North Broward Facility), and the
Keys Gate Dorm Facility with students from Keys Gate K-8 Charter School.
KEY RATING DRIVERS
LIMITED HISTORY DRIVES DOWNGRADE: Excluding the newer schools, the
Financed Schools, with at least five years of audited operating history
and one charter renewal, are unable to fully cover transaction maximum
annual debt service (TMADS) for the series 2010 bonds. Such pooled
transactions are now rated speculative grade by Fitch because of the
rating agency's view that schools with limited operating histories
present substantial credit risk.
OPERATING AND FINANCIAL STABILITY: The Financed Schools are growing
enrollment steadily, albeit slightly below the base case enrollment
projections. Over-performance at three of the schools nearly offsets
weaker growth at the two newest schools. The GAAP margin narrowed to
just below breakeven in fiscal 2012 as the state cut education funding.
Fitch anticipates stabilization in fiscal 2013 given the modest
improvement in state funding levels and continued enrollment gains.
EXPERIENCED MANAGEMENT DRIVES SUCCESS: The Financed Schools benefit from
the experience and successful record of CSUSA, which serves as their
education management organization (EMO). CSUSA's EMO contracts are not
coterminous with final maturity of the bonds. Fitch views this as a
credit risk since the Financed Schools have virtually no management
capability absent CSUSA. Fitch anticipates regular renewals given the
schools' high reliance on CSUSA and its role in starting up the schools.
BENEFICIAL LEGAL PROVISIONS: Bondholders benefit from structural aspects
of the transaction. This includes the consolidated revenue pledge of the
Financed Schools and subordination of operating expenses along with
CSUSA's management fees. Unrestricted revenues of the Financed Schools
flow monthly to the trustee, with initial allocations to debt service.
SUCCESSFUL MATURATION OF NEWEST SCHOOLS: If enrollment growth continues
to meet or slightly exceed base case projections, and financial
performance improves as projected, an investment grade rating is
possible. This would take place once the newest Financed Schools reach
at least five years of audited operating history with one charter
renewal after fiscal 2015.
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
that, if pressured, could negatively impact the rating over time.
MARGIN EXPECTED TO STABILIZE
For fiscal 2013, CSUSA reports the state's budget includesapproximately
2% increases in per pupil aid for the Financed Schools. The schools'
budgets forecast improved performance versus the projected fiscal 2012
results. That said, a modestly negative GAAP margin for the combined
entity (RCS) is likely following last year's negative 0.3% margin. Fitch
views this forecast as attainable based on the increased state aid and
promising enrollment trends (discussed below). Going forward, Fitch
anticipates a return to at least breakeven operations for RCS by fiscal
ENROLLMENT CONTINUING TO INCREASE
The Financed Schools' fiscal 2013 budget assumes consolidated enrollment
of 4,639 students versus 4,373 enrolled at the end of fiscal 2012 (6.1%
increase). RCS CSUSA reports October enrollment of 4,666, which Fitch
views positively. While ahead of budget, the preliminary fiscal 2013
enrollment is slightly short of the base case projection of 4,750.
Renaissance Charter School of St. Lucie (RCSL) and Duval Charter School
of Arlington (DCSA) both remain short of their original targets.
Importantly CSUSA has adjusted these schools' expenses accordingly and
the shortfalls have not significantly affected RCS' financial
CRITERIA CHANGE TRIGGERS REVISED COVERAGE ANALYSIS
Under its recently updated charter school rating criteria, Fitch rates
speculative grade any transactions that are unable to cover maximum
annual debt service (MADS), or transaction MADS (TMADS) where applicable
from schools that are at least five years old with one charter renewal.
Two of the financed schools (RCSL and DCSA) are relatively new and
therefore excluded from Fitch's assessment of TMADS coverage. Under this
adjusted framework, in fiscal 2012 RCS' net income available for debt
service (net available income, as calculated by Fitch) covered TMADS by
0.7 times (x).
COVERAGE FROM ALL SCHOOLS REMAINS SOUND
That same year, net available income for the entire RCS consolidated
entity covered TMADS by an adequate 1.2x, despite the modestly negative
GAAP margin. This was the third consecutive year when consolidated net
available income of all Financed Schools met or exceeded 1.0x TMADS.
After fiscal 2015, when all Financed Schools have completed at least
five years of audited operating history with one charter renewal,
positive rating movement is possible if TMADS coverage remains at or
LIMITED FINANCIAL CUSHION
RCS' available funds (cash and investments that are not restricted) at
the end of fiscal 2012 of $5.2 million covered consolidated operating
expenses and debt by a modest 16.5% and 7.7%, respectively. These
metrics remain very light, but improved from the prior year. As such,
Fitch expects continued gradual improvement as the newest schools reach
CONTRACTS REMAIN STABLE
Charters for the Financed Schools expire between 2015 and 2026. RCS and
CSUSA have never had a renewal application rejected. CSUSA's management
contracts for the Financed Schools expire beginning in 2015 (with
automatic five-year renewals thereafter). Fitch fully expects regular
renewals through final maturity of the series 2010 bonds.
Academic performance will likely be a key factor in charter and
management contract renewals. In fiscal 2012, all but one of the
financed schools received at least an 'A' or 'B' from the state
Department of Education, which the state considers high-performing. DCSA
earned a 'C' for the second consecutive year. A new principal instituted
several measures to improve academic performance. However, she
unexpectedly resigned just after the start of the current school year.
CSUSA has assigned another principal in its network to provide
leadership assistance while the EMO conducts a search for a replacement
principal. DCSA's authorizer views the school's academic performance as
adequate and did not express any concerns regarding the principal
turnover. Fitch will closely monitor CSUSA's ability to restore
operating stability at DCSA, but expects no significant challenges given
the EMO's broad experience in managing schools.
Fitch's actions are part of its completed industry-wide review, which
commenced September of last year when Fitch placed all of its rated
charter schools on Rating Watch Negative. Fitch will release an overview
of its rating actions in a separate press release later today.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Charter School Rating Criteria' (Sept. 19, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Fitch Places all Charter School Bonds on Rating Watch Negative'
(Sept. 19, 2012).
Applicable Criteria and Related Research
Charter School Rating Criteria
Revenue-Supported Rating Criteria
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