[March 08, 2013]

Fitch Downgrades American Academy (CO) to 'BBB'

Fitch Ratings has downgraded to 'BBB' from 'A' and removed from Rating Watch Negative the rating on approximately $16.6 million in outstanding charter school revenue bonds, series 2008, for the Colorado Educational and Cultural Facilities Authority. The bonds are issued on behalf of the American Academy Project.

The Rating Outlook is Stable.

SECURITY

The series 2008 bonds constitute a general obligation of American Academy (AA) and are secured by a first mortgage lien over AA' facility. A cash-funded debt service reserve provides additional bondholder protection.

KEY RATING DRIVERS

STATE MORAL OBLIGATION: The 'BBB' rating is based on AA's inclusion in the state of Colorado's charter school moral obligation program (the program), which provides a mechanism for the state to restore draws on AA's debt service reserve fund.

STRONG STRUCTURAL and LEGAL PROVISIONS: Structural and legal provisions providing strong bondholder protection include the state's debt service intercept program and various reserve funds, reflecting a favorable statutory environment for charter schools.

REVISED RATING METHODOLOGY: The downgrade reflects Fitch's assessment of AA's underlying credit attributes in the context of the organization's revised rating methodology. This is namely with regard to AA's lack of a stable trend of GAAP based operating surpluses and a higher debt burden than normally associated with well performing charters.

FAVORABLE OPERATING ENVIRONMENT: AA enjoys community support, academic performance consistently above state averages and strong demand guided by a vested management team that has a favorable and productive relationship with the local school district and charter authorizer.

STATE FUNDING DECLINES: AA's heavy reliance on state funded per pupil revenues has stressed operating performance as support levels declined over the past three years. While margins dropped below breakeven for two out of the past five years, management's ability to offset reductions and generate near breakeven margins indicates general operational stability.

RATING SENSITIVITIES

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, they could negatively impact the rating over time.

CREDIT PROFILE

STATE MORAL OBLIGATION PROGRAM

Under the program, if a charter school draws on its debt service reserve fund and fails to replenish it immediately, the authority shall submit a certificate to the Governor certifying the amount necessary to restore the reserve fund to its requirement. The Governor shall then submit a request for appropriations to the legislature in an amount sufficient to restore the reserve fund. The general assembly then, at its discretion, may appropriate to restore the reserve fund.

In order to qualify for the program, a school must merit an investment grade credit profile at the time of bond issuance, and participate in the Colorado Charter School Intercept Program. Under the intercept program, the state Treasurer pays a portion of AA's monthly per pupil revenue distribution directly to the trustee in amounts sufficient to pay debt service requirements.

The rating builds upon Fitch's view of the underlying credit quality of the charter school (bottom-up analytic approach). Moral obligation program bonds are secured separately by each school. Fitch views each bond as project-specific. The state is actively engaged in debt issuanes under the moral obligation program, and the statute provides clear mechanisms to trigger the state's moral obligation. In addition to the moral obligation, the statute also provide an additional backstop (the state charter school debt service reserve fund, or CSDSRF) so that an additional appropriation due to a debt service reserve draw down is less likely to be necessary.

THIN LIQUIDITY LIMITS OPERATING CUSHION

AA's cash surpluses, somewhat diminished due to recent year operating weakness, served to maintain available funds at $1.63 million as of fiscal 2012. While quite modest, AA's financial cushion comprises 23.8% of operating expenses and 9.8% of long term debt and offers limited operating flexibility for the school. Long term debt of $16.6 million corresponds to transaction MADS (TMADS) of $1.44 million. This consumes a relatively high 21.3% of unrestricted operating revenues. However, this is offset by AA's ability to adequately cover TMADS 1.1x. As per Fitch's revised charter school rating methodology, debt burdens in excess of 15% combined with a generally inconsistent track record of GAAP based operating surpluses are indicative of sub investment grade credits.

OPERATIONS DEPENDENT ON (News - Alert) STATE FUNDING

State funding in the form of per pupil revenues (PPR) is AA's primary funding source at 77.1% of revenues. Per pupil revenue allocations declined for three consecutive years (2010-2012) in varying degrees. However AA effectively managed operations, reducing staffing and freezing salaries improving operating outcomes but still incurring modest losses for two of those three years. AA generated a negative 1.7% margin in fiscal 2012, due to a 5% reduction in state funding and lower-than-expected fee revenues generated from supplemental programs. While Fitch notes management budgeting practices are somewhat conservative, additional flexibility is required to achieve balance operations especially when faced with mid-year rescissions.

AA also receives, along with other charters in the district, property tax revenue generated by a mill levy override approved by district voters. AA's receipt of mill levy override revenues phased in for fiscal year 2011 with a 60% entitlement of $205,000. This entitlement increased to $348,000 in fiscal 2012, equivalent to 80% of the entitlement and will further grow to $440,000, based on 2012 receipts, in fiscal 2013. Fiscal 2013 operations are budgeted to generate a slightly positive margin which Fitch considers reasonable as state funding reductions are expected to be minimal ($18 per pupil) offset by growth in both enrollment and mill levy allocations.

ACADEMIC SUCCESS DRIVES DEMAND

AA has grown significantly over the past four years and is near full capacity. Fall 2012 enrollment of 920 students, grew slightly from 892 students in the previous year. Student demand has been exceedingly robust and characterized by large waitlists; fall 2013 enrollment is expected to be similar to 2012 and given enrollment patterns, Fitch believes them to be reasonable.

Demand for AA results from a track record of academic success measured by the Colorado Student Assessment Program (CSAP). Since inception in 2005, for six years running, AA students have outperformed both Douglas County School District (the district, rated 'AA+' by Fitch) and statewide averages across multiple grades in reading, writing, math and science proficiency examinations. Fitch notes this very favorably since the district's traditional schools typically rank as one of the highest performing in the state.

EXPERIENCED MANAGEMENT BENEFITS SCHOOL

AA is governed by an independent board of directors who oversees an experienced management team comprised of proactive, experienced and focused individuals, some of whom participated in the founding of the school in 2005. Management's consistent focus on academic achievement, prudent stewardship of school resources in a stressed funding environment, compliance with all applicable charter covenants and maintenance of a productive relationship with the charter authorizer is favorably noted by Fitch.

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 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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