Fitch Ratings has affirmed the 'B' rating on the Industrial Development
Authority of the County of Pima's education revenue refunding bonds
(Carden Traditional Schools project) series 2012.
Fitch removes the Rating Watch Negative and assigns the bonds a Negative
Absolute and unconditional obligation of the borrower (Calibre, or CTS)
and the guarantor (E-Institute Charter School, Inc. or EICS), payable
from all legally available revenues, and secured by a first lien on
facilities owned by the borrower. Gross revenues of both the borrower
and guarantor will flow directly from the state treasurer to the trustee
for debt service.
KEY RATING DRIVERS
NEGATIVE OUTLOOK: Removal of the Rating Watch Negative reflects
Calibre's compliance with the debt service coverage requirement in
fiscal 2013 and lack of immediate concerns of covenant violations. The
Negative Outlook reflects Calibre's deteriorated financial position and
expectation that the institution's going concern status will be resolved
upon the receipt of the fiscal 2014 audit, in December of this year.
Meanwhile, Fitch is concerned about the school's declining margins both
on an individual and consolidated (with EICS) basis and potential
challenges in meeting coverage requirements for escalating debt service
SPECULATIVE-GRADE CHARACTERISTICS: The 'B' rating reflects Calibre's
extremely tenuous financial position which includes a high debt burden,
expense growth historically outpacing revenues, lower than anticipated
enrollment levels and coverage of DS only with substantial, albeit
planned, EICS support.
ENROLLMENT SHORTFALL: Actual enrollment at Calibre and EICS' campuses is
significantly below the school's base case projections. Fitch notes that
initial headcount projections were aggressive; however, Calibre's
ability to adjust expenditures for a lower headcount could alleviate
operating pressure and possibly stabilize performance.
MANAGEMENT RESPONSIVENESS TO IMPROVE: Calibre's previous CFO left the
institution in spring of 2013 and was replaced in August 2013. This gap
in the position caused marked challenges in procuring information during
previous reviews. While communication with the school has increased
marginally with the new CFO, Fitch expects Calibre's future
responsiveness levels to improve enough to be comparable with other
rated schools in the portfolio.
FAILURE OF FY2014 COVERAGE TEST: The inability to meet the transaction
maximum annual debt service (TMADS) coverage test of one times (x) for
the combined entity (Calibre and EICS) in fiscal 2014 may constitute an
event of default. Fitch may downgrade the bonds in this case to reflect
the increased volatility due to remedies that include an accelerated
timeline for bond redemption.
PROTRACTED FISCAL IMBALANCE: A persistent negative trend for Calibre
operating margins resulting in the continuance of a going concern note
from the auditor for another year, in Fitch's view, indicates an
intrinsic lack of fiscal stability and would likely result in ratings
RELIANCE ON EICS PERFORMANCE: Improvement for EICS operations is
essential to the current rating assuming Calibre's continued weak
margins. However, consolidated improvement can only be effectuated by
EICS operations equating to or eclipsing the relative size of Calibre's
STANDARD CHARTER RENEWAL RISK: Like all Fitch-rated charter schools,
Calibre and EICS are subject to charter renewal risk, which Fitch views
as a substantial credit concern. Also, balance sheet resources are very
limited, providing virtually no offset in the event of continued
TRANSACTION PARTICIPANT OVERVIEW
Calibre serves grades K-8 and includes two campuses, one in Glendale and
another in Surprise, AZ. EICS, the financial guarantor for the rated
debt of CA, maintains six physical campuses. The financial statements
and charter agreements for both schools each include a fully-online
campus managed by the schools' education management organization (EMO),
Learning Matters Educational Group, Inc. (LMEG). Both Calibre and EICS
are authorized by Arizona State Board for Charter Schools (ASBCS, the
authorizer) with 15-year terms that expire in 2015. LMEG serves as EMO
for both schools and maintains a working relationship with the ASBCS.
NEGATIVE OUTLOOK REFLECTS UNCERTAINTY
The covenant compares combined net income available for debt service of
Calibre and EICS to maximum annual debt service, excluding the final
year of maturity TMADS. Coverage below 1.0x could be declared an event
of default under terms of the loan agreement by the trustee. The
trustee's remedies for events of default include acceleration,
receivership, foreclosure, or a suit for judgment. While the declaration
is subject to certain loan agreement provisions allowing Calibre and
EICS to develop a remedy plan within specified timeframes, in the event
of acceleration, Fitch views Calibre and EICS as highly unlikely to be
able to meet full and immediate payment on the bonds without defaulting.
ENROLLMENT BELOW PROJECTIONS
Calibre and EICS enrolled fewer students in fall of 2013 than originally
projected when the bonds were issued. While average daily membership
(ADM) improved from 752 to 820 for Calibre and 557 to 698 for EICS, the
original fall 2013 expectations of 1,050 and 895 for Calibre and EICS,
respectively, grossly overshot actual enrollment trends. Originally,
Fitch noted strong waitlists for Calibre and EICS. However, fall 2013
information relating to waitlists did not record such pent up demand.
Therefore, the foregoing expectation for both Calibre and EICS is
incremental enrollment growth but this information cannot be verified as
no waitlist information was provided for fall 2013 enrollment.
Fitch favorably notes that academic performance for both Calibre
campuses are adequate and are comparable to peers. Additionally, EICS
was able to re-classify all of its campuses as alternative, thereby
reducing the benchmarks used to evaluate performance and more accurately
reflect its at-risk population. Calibre and EICS were noted as generally
meeting academic requirements by the Arizona State Board for Charter
Schools (ASBCS, the authorizer).
OPERATING MARGINS CONTINUE TO DECLINE
Consolidated fiscal 2013 margins declined to 6.3% from 7.4% in fiscal
2012. While EICS' individual performance improved markedly, from 3.8% to
15.3%, Calibre generated a negative 24.8% margin, further weakened from
fiscal 2012's 18.5% margin. Fitch notes that Calibre's expense growth
has outpaced revenue increases for the past two years. Unless there is a
reversal of this trend, financial wherewithal and debt service coverage
will continue to hinge substantially on EICS for the long term.
During fiscal 2013, LMEG, as the management company (EMO) implemented
several measures to align expenses with revenues including salary
freezes, layoffs, and various downward adjustments to facility and
technology-related costs. Fiscal 2013 results are not indicative of
overall improvement as these improvements were enacted mid-year and
Fitch expects these changes may be evidenced in fiscal 2014 results.
FY2014 budgeted figures indicate revenue growth based on enrollment and
stable state funding. Fitch, acknowledging the auditor's expressed
concern about Calibre's ongoing viability in both the fiscal 2012 and
2013 audit, expects rating pressure if this concern is unmitigated for
the fiscal 2014.
LIQUIDITY AND DEBT SERVICE COVERAGE IMPROVE
Available funds for Calibre and EICS, on a consolidated basis, covered
just 12.2% and 7.2% of operating expenses and debt, respectively. While
improved from fiscal 2012, these levels remain very light, which is
typical of most charter schools reviewed by Fitch.
Combined TMADS coverage (EICS and Calibre) improved from a very weak
0.3x to 0.9x in fiscal 2013. Adjusting for management fees which are
subordinate to DS payment, coverage improved to 1.8x in fiscal 2013, up
from 1.4x in 2012. Notwithstanding this improvement, Calibre,
individually can only support roughly one-third of required TMADS and is
expected to remain at this level for the foreseeable future. Fitch notes
positively that EICS, as the guarantor of the bonds, will continue to
support Calibre operations until the bonds are entirely paid off.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the
'Revenue-Supported Rating Criteria' and 'Charter School Rating
Criteria', this action was informed by information from the Arizona
Department of Education website (http://www.azed.gov/).
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria', dated June 3, 2013;
--'Charter School Rating Criteria', dated Sept. 19, 2012;
--'Fitch Maintains The Rating Watch Negative on Calibre Academy (AZ)
Revenue Bonds', dated Nov. 4, 2013;
--'Fitch Downgrades Carden Traditional Schools (AZ) To 'B'; Still On
Watch Negative', dated March 8, 2013.
Revenue-Supported Rating Criteria
Charter School 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'.
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
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CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
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