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Fitch Affirms Pinellas Preparatory Academy (FL) at 'BB'; Outlook Stable
[January 26, 2015]

Fitch Affirms Pinellas Preparatory Academy (FL) at 'BB'; Outlook Stable


Fitch Ratings has affirmed the 'BB' rating on the following series of bonds issued by the Pinellas County Educational Facilities Authority on behalf of Pinellas Preparatory Academy, Inc. (PPA, Inc.):

--$8,670,000 revenue bonds series 2011A;

--$55,000 revenue bonds series 2011B (taxable).

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of PPA, Inc., which operates Pinellas Preparatory Academy (Pinellas Prep), a charter school serving grades 4 - 8, and Pinellas Primary Academy (Pinellas Primary), a charter school serving grades K-3 located in Largo, Florida. The bonds are further secured by a first mortgage lien over the facility in which the schools are co-located and a cash-funded debt service reserve.

KEY RATING DRIVERS

STABLE OPERATIONS: The 'BB' rating reflects Pinellas Prep's 12-year operating history, with multiple charter renewals; track record of enrollment growth, coupled with solid demand for Pinellas Primary. The financial cushion remains low but generally positive operating results should continue to support slow growth in financial flexibility.

LIMITED HISTORY OF PINELLAS PRIMARY: Pinellas Primary's limited three-year operating history currently limits the rating. Per Fitch's charter school rating criteria, the calculation of debt service coverage therefore only includes Pinellas Prep. Transaction maximum annual debt service (TMADS) coverage on the series 2011 bonds from Pinellas Prep alone was just 0.9x in fiscal 2014. TMADS coverage rises to over 1.9x on a combined basis.

STANDARD SECTOR CONCERNS: Additional credit concerns include revenue concentration, a weak balance sheet cushion and a high debt burden, all of which are characteristic of the charter school sector.

RATING SENSITIVITIES

ACHIEVEMENT OF FINANCIAL METRICS: Continued improvement in operating performance yielding TMADS coverage by Pinellas Prep and growth in balance sheet resources could lead to an upgrade.

CHARTER RENEWAL: Five years of audited operating history with at least one charter renewal could lead to an upgrade. Pinellas Primary's initial charter expires in June 2016.

CHARTER RELATED CONCERNS: A limited financial cushion; substantial reliance on enrollment-driven, per pupil funding; and charter renewal risk are credit concerns common among all charter schools that, if pressured, could negatively impact the rating over time.

CREDIT PROFILE

One of PPA, Inc.'s key credit strengths remains Pinellas Prep's operating track record. Pinellas Prep is in its thirteenth academic year and has had its charter renewed three times to date, most recently in 2010 for a 15-year period. Fitch views the school's operating history and multiple renewals, coupled with its 15-year charter term, favorably. Pinellas Primary is still operating under its initial five-year charter that was granted in 2011. Fitch notes positively that both schools remain in good standing under their respective charters and continue to maintain a positive working relationship with their authorizer, Pinellas County School Board (PCSB).

DEMAND SUPPORTED BY SOLID ACADEMICS

Pinellas Prep currently enrolls 440 students in grades 4-8 and Pinellas Primary enrolls 324 students in grades K-3. On a combined basis, enrollment was slightly higher than last year, which was expected due to the enrollment caps imposed by the schools' charters. Pinellas Prep and Pinellas Primary's current charters caps enrollment at 440 and 350 students, respectively. There are no plans to increase enrollment above current levels at either school. In Florida, state statute permits charter schools designated as high performing, which Pinellas Prep is, to expand enrollment by 15% wihout requiring authorizer approval. Pinellas Primary could add additional students at any time without requesting an amendment to the charter which allows some budgeting flexibility.



The schools maintain actively managed waiting lists, with a total of 394 students wait-listed as of Dec. 31, 2014; 147 for Pinellas Prep and 247 for Pinellas Primary. Fitch views the schools' nearly full enrollment and sizeable wait lists as reflective of the community need and demand for its programs.

Academic performance at the schools remains solid. Pinellas Prep remains 'high performing' by the Florida Department of Education. Pinellas Primary does not receive a letter grade due to the lower grades its serves. The schools' average scores on Florida's Comprehensive Assessment Tests continue to exceed the state and Pinellas County district average.


SLIM CUSHION; SOUND MARGINS

Fitch views continued enrollment stability and breakeven to positive operations critical in driving balance sheet growth. The schools' current balance sheet resources provide little financial flexibility. On a combined basis, available funds (cash and investments not restricted) totaled $918,000 as of June 30, 2014, which is up from $584,000 as of June 30, 2013. Available funds covered fiscal 2014 operating expenses ($5.2 million) and outstanding debt ($8.8 million) by 17.6% and 10.5% respectively. While these metrics increased from fiscal 2013 levels, they are still considered very low.

The fiscal 2014 combined operating margin was a positive 9.3%. On a stand-alone basis, Pinellas Prep's operating margin improved to 6.4%, from 3.4% in fiscal 2013. Fitch notes that Pinellas Prep's restated fiscal 2013 margin reflected significant operating improvement from the negative 3.1% margin reported previously and averaged a sound 3.1% over the prior five fiscal years (2010 - 2014). Pinellas Primary's margin remained positive but tightened to 3.3% in fiscal 2014 as expected, from 10.1% in fiscal 2013 (following a deficit in its inaugural fiscal 2012) due to investment in additional faculty and staff. Fitch expects stability at the lower margin level over the short term.

Management anticipates improved profitability in fiscal 2015 due to proposed increases in state per pupil funding (Fitch rates Florida GOs 'AAA' with a Stable Outlook). The recommended state budget forecasts revenue growth in fiscal 2015, which should boost educational funding statewide and lend further stability to the schools' funding profile. Similar to most charter schools, per pupil funding makes up the majority of the schools' revenue (92.6% on a combined basis in fiscal 2014).

HIGH DEBT BURDEN

The schools' financial leverage remains high, as measured by pro forma MADS coverage and burden. TMADS consumed a high 12.8% of the schools' combined fiscal 2014 operating revenues of $5.8 million. Total debt outstanding of about $8.8 million also represents a high 6.4x of combined net income available for debt service of $1.4 million. While these metrics continued to reflect high leverage position, they improved from fiscal 2013 levels. Improvement is attributable to strong demand and improved state per pupil funding after a significant cut in fiscal 2012. Moreover, further increases in state funding and a lack of additional capital needs should cause the debt burden to moderate over time.

Pinellas Prep is unable to cover the carrying charges on the series 2011 bonds with its current financial resources despite a track record of enrollment growth, solid academic performance and operating surpluses. Pinellas Prep's fiscal 2014 net income available for debt service of $669,000 covered TMADS of $738,000 by only 0.9x, which is similar to the fiscal 2013 level. Under Fitch's charter school rating criteria, a school having less than five years of audited operating history and no charter renewal is excluded from this calculation in pooled transactions.

Pinellas Primary has experienced strong demand to date and benefits from its affiliation with Pinellas Prep despite having only completed three full academic years under its initial charter. Fitch notes that when incorporating Pinellas Prep into the debt service calculation, TMADS coverage improved to an adequate 1.9x for fiscal 2014, which meets the debt service coverage covenant of 1.1x.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Charter School Rating Criteria' (Sept. 19, 2012);

--'Fitch Affirms Pinellas Preparatory Academy (FL) at 'BB' (Feb. 13, 2014).

Applicable Criteria and Related Research:

Charter School Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978610

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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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