[March 08, 2013]

Fitch Downgrades Renaissance Charter School's (FL) 2010 Revs to 'BB+'

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.

SECURITY

--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.

RATING SENSITIVITIES

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.

CREDIT PROFILE

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 2014.

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 performance.

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 above 1.0x.

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 enrollment capacity.

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

Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=681015

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.

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