|[January 29, 2014]
Fitch Affirms Alliance for College-Ready Public Schools, CA's Rev Bonds at 'BBB-'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings affirms its 'BBB-' rating on approximately $22 million of
outstanding California Statewide Communities Development Authority
school facility revenue bonds, series 2011A issued on behalf of Alliance
for College-Ready Public Schools (Alliance).
The Rating Outlook is Stable.
The bonds are payable from lease payments made by three Alliance-managed
charter schools (Ouchi High School, Skirball Middle School and O'Donovan
Middle Academy) and secured by an assignment of rents and deed of trust
over the school facilities. Lease payments constitute a joint and
several obligation payable from the schools' gross revenues. Additional
bondholder protections include a debt service reserve cash-funded to
MADS and a capital maintenance and operating fund.
KEY RATING DRIVERS
SOUND FINANCIAL PERFORMANCE: The three obligated charter schools' (the
schools) track record of operating surpluses; sound coverage of pro
forma MADS from current operations; and a manageable, albeit high, debt
burden, underpin the 'BBB-' rating. Financial performance is tempered by
a balance sheet cushion that is limited, yet acceptable for the rating
STABLE DEMAND: The schools maintain full and stable enrollments,
bolstered by strong programmatic and fiscal management provided by
Alliance, a well-established charter management organization (CMO) that
manages a successful network of 22 Los Angeles area based charter
LIMITED OPERATING HISTORY: Counterbalancing the above credit strengths
are the schools' relatively limited operating histories, including at or
just over five years of audited operating history.
CHARTER RENEWAL SUCCESS: While their operating histories are limited,
the schools now have three charter renewals among them, with the
youngest of the three schools having recently been merged into the
oldest of the three to form a continuous grade 6-12 program under a
single, recently renewed five-year charter.
MANAGEMENT INTERRUPTION: Any adverse change or interruption to the
existing CMO relationship between Alliance and the schools, while
unlikely, would strongly influence the rating.
CHARTER RELATED CONCERNS: A limited financial cushion; substantial
reliance on enrollment-driven, per pupil funding; and charter renewal
risk are credit risks common among all charter school transactions that,
if pressured, could negatively impact the rating over time.
The schools' financial performance remains sound, with each having
generated operating surpluses since inception, albeit based on
relatively small revenue bases. Operating margins ranged between a
healthy 12.9% and 21% for fiscal 2013, driven largely by prudent
budgeting and administrative efficiencies derived through the Alliance
network. The schools continue to benefit from the strong financial
oversight and budgetary guidance provided by Alliance and stable
enrollments which support consistent operating performance.
Characteristic of charter schools, revenue diversity is limited with
state aid comprising the majority (two-thirds) of funding and federal
aid representing another 12%-17%.
Following significant cuts to state funding of public K-12 education
from fiscal years 2009-2012, funding levels were held flat for fiscal
2013 and improved for fiscal 2014, primarily due to voter passage of the
governor's tax increase initiative, Proposition 30, in November 2012.
Fitch rates California's general obligation bonds 'A' with a Stable
Outlook. Proposition 30 also led to a revision of the state's funding
formula, which benefits Alliance's schools due to the mostly low income
demographic they serve. Alliance anticipates another positive operating
result for the schools in fiscal 2014, which Fitch considers realistic
based o enrollment stability, improved state funding, and management's
conservative budgeting and operating track record.
On a combined basis, the schools' debt burden is high but manageable.
Total pro forma MADS ($1.7 million) represented 12% of the schools'
combined fiscal 2013 operating revenues of $14.4 million. The schools'
positive operations enabled them to generate sufficient coverage of
between 1-2.5 times (x) pro forma MADS for the past five fiscal years
(2.5x in fiscal 2013). Debt to net income available for debt service was
also a moderate 5.1x. In addition, Alliance's management fee, which
totaled $1 million for the schools in fiscal 2013, is subordinate to
debt service, providing an added layer of flexibility in the event
While joint and several, Fitch notes favorably that on an individual
basis, coverage of the schools' internally allotted share of debt
service was about 2.5x, 2.2x and 3.2x for Ouchi, Skirball, and
O'Donovan, respectively, in fiscal 2013. Fitch considers a track record
of over 1x MADS coverage and a debt burden under 15% investment grade
Typical of charter schools, the schools' balance sheet resources are
limited, though improved slightly in fiscal 2013. On a combined basis,
available funds (cash and investments not permanently restricted)
totaled $3.5 million as of June 30, 2013, covering fiscal 2013 operating
expenses ($11.9 million) and debt ($22 million) by 29.4% and 16%,
respectively. While these liquidity metrics are considered low, they
provide the schools a modest financial cushion to manage any unexpected
funding declines and/or expenditure increases.
Enrollment at the schools remains stable. Combined enrollment at the
three schools is currently 1,465, up slightly from 1,450 the prior year.
Ouchi enrolled 575 students in grades 9-12, while Skirball and O'Donovan
enrolled 440 and 450 students in grades 6-8, respectively. Given
Alliance's goal of maintaining small schools, each school remains at or
near its desired capacity and enrollment is not anticipated to vary
significantly from current levels. This is viewed favorably by Fitch as
no material enrollment growth is planned or needed to meet the schools'
financial obligations. In total, Alliance presently manages 22 schools
in Los Angeles, serving nearly 10,000 students in grades 6-12.
In general, Alliance-managed schools continue to outperform their
district peers academically as measured by California's academic
performance index (API). While the schools' API scores are solid,
O'Donovan Middle Academy was highlighted as needing improvement and was
placed on the district's program improvement list in 2012. The district
expressed concern over O'Donovan's academic record, but remains
confident in Alliance's track record and its programmatic leadership of
While the schools continue to mature, Fitch still considers their
operating histories as limited. Ouchi, Skirball and O'Donovan have
seven, six and five years of audited financial statements, respectively,
which is at or just over Fitch's minimum (five-year) expectation for
investment grade charter schools. However, Fitch notes that the schools
now have three charter renewals among them. Ouchi recently received its
second five-year renewal, while Skirball's second renewal will come up
in June 2016. The schools' renewal success to date is viewed favorably
by Fitch, but still reflects their limited histories.
O'Donovan is the youngest school, having just completed its fifth year
of audited financial statements in fiscal 2013 and not undergoing a
renewal on its own. However, Alliance merged this school into Ouchi
commencing with the current 2013-2014 academic year to form a continuous
6-12 program on the two schools' shared campus. As such, O'Donovan's
existing charter was collapsed and Ouchi's charter was revised to
incorporate both schools and simultaneously renewed for a further
five-year term effective June 2014 to June 2019.
Fitch continues to take comfort in Alliance's broader reputation and
positive working relationship with its schools' authorizer (Los Angeles
Unified School District-the district), which partially mitigates renewal
risk. The district continues to view Alliance as a strong charter
operator and a partner within the district; the second largest in the
country. This was evident in its recent renewal of Ouchi's revised
charter. It also cited no issues at present that would result in
nonrenewal of Skirball's charter in 2016.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Charter School Rating Criteria' (Sept. 19, 2012);
--'Fitch Downgrades Alliance for College-Ready Public Schools (CA (News - Alert)) to
'BBB-'' (March 8, 2013).
Applicable Criteria and Related Research:
Charter School Rating Criteria
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