|[March 08, 2013]
Fitch Downgrades Cambridge Academy East (AZ) to 'BB-'
NEW YORK --(Business Wire)--
Fitch Ratings has downgraded to 'BB-' from 'BB+' and removed from Rating
Watch Negative the rating on $8.4 million charter school revenue bonds,
series 2010, issued by the Industrial Development Authority of the
County of Pima, Arizona. The bonds were issued on behalf of Cambridge
Academy East (CAE).
The Rating Outlook is Stable
The bonds are a general obligation of CAE and secured by a first
mortgage on the financed facilities. The trustee receives payments
directly from the state to cover debt service.
KEY RATING DRIVERS
WEAK FINANCIAL METRICS: The downgrade is a result of CAE's operating
performance, balance sheet resources and debt burden. Fitch considers
these attributes low speculative grade under its recently updated
charter school rating criteria. While academic performance and
enrollment growth counter-balance some concerns, the overall financial
profile primarily exhibits speculative grade characteristics more
consistent with the 'BB-' rating.
IMPROVEMENT FOR FISCAL 2013: The Stable Outlook indicates an expectation
of break-even operations for fiscal 2013 and operating surpluses
thereafter as a result of enrollment growth.
GOVERNANCE LACKS INDEPENDENCE: While demonstrating effective management,
a majority of CAE's board maintains inter-related business and familial
ties with the management team. Fitch's revised investment grade
criterion looks for a fully independent board.
HIGH DEBT, LOW COVERAGE: Transaction maximum annual debt service (TMADS)
consumes a high 19.2% of operating revenues and current net income from
operations is unable to cover debt adequately; TMADS coverage was 0.7x
for fiscal 2012.
CONTINUED FISCAL IMBALANCE: A continued trend of negative margins and
inability to service debt with income from operations would negatively
pressure the rating.
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 impact the rating over time.
CAE's financial profile indicates the characteristics of a speculative
grade rating. CAE's operations have generated two consecutive years of
deeply negative margins. Fitch expects the -12.1% operating deficit for
fiscal 2012 (weaker than the previous years' negative 9%%) to improve
markedly to near break-even for the current fiscal year (2013) as the
CAE streamlines costs and improves monthly cash flow.
Operating stress was driven by state aid cuts in 2011 (down 8% from the
prior year) and high depreciation expense reflecting capital
improvements to the campus financed by the 2010 bond issuance. In
addition, net income available for debt service for the past two yers
has been insufficient to provide at least 1x coverage of TMADS
(approximately $660,000). That said, Fitch expects coverage to improve
Fitch also expects that over time, CAE's operations will reflect
enrollment at full capacity and operating revenues that are in excess of
recurring expenditures. Nonetheless, CAE will likely remain at its
current rating level until operations stabilize and breakeven to
slightly positive margins are derived on a consistent basis.
CAE's new financial manager has helped to improve operating performance.
Additionally, strategic shifting of key positions has enabled CAE to
create a position for an administrator who is tasked with securing
previously untapped governmental revenue sources. However, certain close
ties maintained by the board to senior management, as well as the
control maintained by the founding family of CAE, make for a governance
structure that is not considered consistent with the strength and
independence implied by an investment grade rating by Fitch.
Enrollment growth resulted from adding the seventh and eighth grades in
school year 2011 and 2012, respectively. The headcount for fall 2012 was
616 students, 12% higher than the student count in 2011 (548 students).
Maximum capacity for CAE is 760 students. Fitch expects CAE to reach
this capacity in time as the school matches student growth, effective
instructional capability and operational sufficiency. CAE competes for
students with neighboring charter schools and has invested in
extracurricular programs to retain and attract incoming students.
Despite competition from other charter schools in the area, CAE has
effectively grown and sustained enrollment throughout its operating
CAE's limited balance sheet, negatively impacted by fiscal 2012's
operating deficit, poses a challenge. Available funds, totaling $361,000
in fiscal 2012 constituted a meager 9.4% of annual operating expenses
($3.9 million) and 4.3% of total outstanding debt ($8.4 million). Fitch
notes that charter schools typically have low levels of financial
flexibility. Additionally, the ability to grow unrestricted cash on hand
is constrained due to thin margins.
CAE is an educational establishment serving grades K-8, founded by a
family of educators. Originally chartered in 2002, CAE is in year 11 of
its 15-year charter. CAE began operations in 1999 and currently operates
two campuses situated in Maricopa County, AZ. An intercept mechanism for
state fund disbursements to the school diverts funds first to the
trustee for debt service before releasing monies for operations.
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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