|[March 08, 2013]
Fitch Downgrades American Academy (CO) to 'BBB'
NEW YORK --(Business Wire)--
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.
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
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
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.
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
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
Revenue-Supported Rating Criteria
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DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
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AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
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