Fitch Ratings affirms the rating on approximately $75.7 million of
series 2007A bonds issued by the Pima County Industrial Development
Authority, Arizona (PCIDA) at 'BB'. The bonds were issued on behalf of
the American Charter Schools Foundation (ACSF).
The Rating Outlook is Stable.
The bonds are secured by a joint and several pledge of the revenues of
the 10 ACSF schools (collectively, the schools), which primarily consist
of state aid based on enrollment. The bonds are additionally secured by
a debt service reserve (DSR). The school also makes annual renewal and
replacement deposits. Charter payments from the state are made directly
to the bond trustee. The annual debt service coverage requirement is
1.0x sufficiency; a higher coverage level is required for issuance of
KEY RATING DRIVERS
WEAK FINANCIAL PROFILE: The rating reflects a history of break-even to
slightly negative GAAP operations, a very limited financial cushion, a
high debt burden and adequate, albeit limited, coverage of transaction
maximum annual debt service (TMADS). ACSF's financial profile
demonstrates characteristics consistent with a speculative grade rating.
ENROLLMENT ISSUES PERSIST: Aggregate enrollment at the schools grew
modestly in fall 2013, following 4% growth in fall 2012, but three
consecutive years of declines before that. While the 10 bond schools
have stabilized as a group, enrollment trends remain uneven among them.
STRUCTURAL BONDHOLDER PROVISIONS: Legal and structural security measures
include a trustee intercept of state aid. This provides for payment of
debt service before any pro-rata distribution of revenues to the
schools, and contractual subordination of the charter management
organization's (CMO) fee.
MARGIN DETERIORATION: Should ACSF's operating margin deteriorate for any
reason, causing TMADS coverage to fall below 1.0x or further weaken
balance sheet resources, negative rating pressure is likely.
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
which, if pressured, could negatively impact the rating over time.
ACSF is composed of 10 high schools, nine of which operate in the
Phoenix, AZ metropolitan area. The tenth school operates in Tucson. All
of the 10 bond schools are alternative schools except for Alta Vista
High School. The schools maintain independent charters from the Arizona
State Board of Charter Schools. Each charter has a 15-year term (which
is standard in Arizona) and expires in 2017 or 2018, depending on the
school. The ACSF bond schools each maintain management agreements with
the Leona Group, one of the largest CMOs in the state of Arizona. At
this time, Leona manages 70 charter schools nationwide, including 27 in
Arizona (including the 10 bond schools), 23 in Michigan, 11 in Ohio, and
several in Indiana and Florida. Leona maintains its headquarters in
Michigan. In Arizona, ACSF/Leona expects to open two new elementary
charter schols in fall 2015, as well as a new preparatory high school.
SLIM OPERATING PERFORMANCE
The 'BB' rating indicates an overall financial profile that Fitch
considers to be consistent with a non-investment-grade rating. ACSF's
GAAP operating margin was negative 1.1% in fiscal 2013, which compared
to negative 1.3% in 2012, and negative 0.5% in 2011. The margin has
averaged negative 0.8% between fiscal years 2008-2013. Fitch adjusted
fiscal 2012 results to exclude certain accounting changes artificially
inflated operating results.
The ACFS bond schools, as a group, have generated slim but positive
transactional MADS coverage in the last five years. Fitch defines TMADS
as maximum annual debt service excluding a balloon payment in the last
maturity typically funded from the DSR. TMADS coverage was 1.1x for the
fiscal year ended June 30, 2013, which compares to 1.1x or 1.2x in the
previous four fiscal years. For the current 2014 budget year, the CMO
expects operating results to be similar or slightly stronger than fiscal
LIMITED BALANCE SHEET
In addition to slim operating results, ACFS has a limited balance sheet,
both of which demonstrate limited operating flexibility. Available
funds, defined as cash and investments not permanently restricted,
declined to $994,000, down from $1.37 million in fiscal 2012. Fiscal
2013 available funds represented just 2.9% of operating expenses ($34.3
million) and 1.8% of outstanding debt ($76.9 million at that time).
Fitch considers these balance sheet ratios low for the rating category.
HIGH DEBT BURDEN
ACSF's slim operating performance and balance sheet exacerbate concerns
about the foundation's high debt burden. TMADS of $5.6 million
represented 16.4% of fiscal 2013 operating revenues, consistent with
recent years. Fitch's criteria consider a debt burden exceeding 15% to
be a speculative grade attribute.
ENROLLMENT ISSUES LIMIT BUDGET IMPROVEMENT
In both fall 2013 and fall 2012, the CMO successfully increased
aggregate enrollment across the bond schools, by 0.4% and 4.3%,
respectively. Fitch views this turnaround positively given that the
aggregate student population declined in each of the prior three
enrollment cycles (fall 2009, 2010 and 2011). Enrollment growth among
the 10 schools continues to be uneven, with growth in six high school
offsetting declines in others. Management reports continued focus on
growing enrollment where capacity exists for it (some schools are at
capacity). The persisting enrollment issues are reflected in the 'BB'
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Charter School Rating Criteria' (Sept. 19, 2012);
--'Revenue-Supported Rating Criteria (June, 2013);
-- Fitch Downgrades American Charter Schools Foundation (MI) to 'BB',
dated March 3, 2013
Revenue-Supported Rating Criteria
Charter School Rating Criteria
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