Fitch Ratings has affirmed the 'BBB-' rating on the following Industrial
Development Authority of the County of Pima's New Plan Learning Inc.
(NPL) Project educational facility revenue bonds:
--$32.57 million tax-exempt series 2011A;
--$0.545 million taxable series 2011B
The Rating Outlook is revised to Negative from Stable.
Fitch recently published an exposure draft of the charter school rating
criteria (Charter School Rating Criteria: Exposure Draft, dated July 19,
2012). The draft includes a number of proposed amendments to existing
criteria. If applied in the proposed form, the exposure draft would
trigger a substantial number of downgrades to existing charter school
ratings. After the exposure draft comment period and upon the
publication of the new criteria, Fitch expects to place on Rating Watch
Negative those schools it views at risk of downgrades, which could
include all charter school ratings. Fitch would then conduct full rating
reviews for those schools over the following six months, utilizing the
The bonds are secured by the gross revenues of NPL primarily comprised
of lease payments of four participant schools located in Illinois and
Ohio. Additional bondholder protections include a mortgage on each
transaction participant's school facility; a debt service reserve,
funded up to maximum annual debt service (MADS); an additional reserve
funded to $1 million for the Illinois school; a capital and maintenance
reserve of $1 million; and a revenue fund with a balance of $500,000. In
addition there is a debt service coverage ratio requirement of 120% of
MADS and cash on hand maintained at each of the participating schools
equal to 12% of the previous year's operating expenses.
KEY RATING DRIVERS
UNCERTAIN FUTURE FINANCIAL PERFORMANCE: The Negative Outlook reflects
the decline in enrollment at two of the four participant schools during
fiscal 2012 and weak operating performance on a cumulative basis. The
Outlook also addresses the uncertainty that projected enrollment growth
for fall 2012 will be realized and enable the participant schools to
generate revenues sufficient to service escalating rental payments as
well as maintain balance sheet resources in line with bond covenants.
STRONG LEGAL AND STRUCTURAL PROVISIONS: Bond covenants prioritize debt
service payments to bondholders, offer multiple levels of reserves to
underpin lease payments structured to cover debt service by 1.2 times
(x), and require maintenance of reserves equaling 12% of operating
expenses at each participant school. Additionally, management fees to
the charter school management firm, Concept, are subordinate to lease
EXPERIENCED CHARTER MANAGEMENT ORGANIZATION: Concept is a key component
of the schools' operating and academic success, supporting high academic
standards and compliance with all elements of their authorized charters.
STANDARD SECTOR CONCERNS: The participating schools are characterized
generally by weak balance sheet resources, very high debt burdens,
pressured state funding environments, and charter renewal risk.
WHAT COULD TRIGGER A RATING ACTION
FAILURE TO REALIZE PROJECTED ENROLLMENT GAINS: An inability to realize
enrollment growth expected for fall 2012 would weaken NPL's ability to
meet an escalating lease payment in the coming year and likely result in
OPERATIONAL CHALLENGES: The participating schools' inability to achieve
break even to positive operating margins in the coming fiscal year would
create rating pressure.
NPL leases charter school facilities to four charter school participants
for which it receives, from each school individually, lease rental
payments that are structured to exceed debt service on the bonds. The
four charter schools included in the transaction are Chicago Math and
Science Academy (CMSA), located in Chicago, IL; Horizon Science Academy
Dayton (Dayton), located in Dayton, OH; and HSA Springfield
(Springfield) and HSA Toledo (Toledo), both located in Toledo, OH. The
performance of the underlying participants is a key consideration in
ascertaining the ability of NPL to meet its debt service obligations.
The Negative Outlook is based on weak operating characteristics of
several of the participant schools coupled with a recent lack of
consistency in enrollment trends. While forecasts provided to Fitch
indicated growth in enrollment at the Ohio schools in the early years,
Dayton and Toledo experienced a 12.8% drop in enrollment (71 students)
from 2011 levels, according to its third quarter student count provided
to the state. The schools attribute this drop to a combination of a
delay in bringing promised athletic programs to both schools and charter
school culture acclimation challenges for students at the Dayton campus,
which enrolled its first class in fiscal 2010. CMSA was at full capacity
for most of the 2012 school year at 599 students while Springfield
experienced growth of 17 students through the same period.
The 2011 bonds funded construction projects that will enable the schools
to add athletic programs, gymnasiums and additional classroom space for
the coming school year. As a result of these improvements, the Ohio
schools are expecting approximately 400 additional students for the new
school year. While the schools have capacity to accommodate those
additional students, Fitch believes that the numbers remain speculative.
The inability for the schools to realize enrollment growth and sustain
student counts through the year would prove detrimental to the rating.
Operating performance was weak in fiscal 2011 on a cumulative basis for
the participant schools. Although performance is expected to improve
based on anticipated growth at each Ohio school, enrollment declines at
Dayton and Toledo for the school year 2012 are likely to have negatively
impacted 2012 fiscal results. Fitch will review audited financial
statements as they are made available, to ascertain performance, and
compliance with various bond covenants applicable to the schools.
Continued operational stress and inability to generate at least break
even margins after lease payments for fiscal 2013 would create rating
Bond provisions for NPL are strong. The required debt service coverage
ratio is 1.2x and the cash on hand requirement is 12% of operating
expenses for the participating schools. In addition, the indenture
requires NPL to retain an operating reserve of no less than 12% of
aggregate corporate revenues. Provisions were enhanced prior to the
August 2011 bond sale.
The charter management organization, Concept, continues to be integral
to the success of the four schools. Concept's management practices have
historically driven strong academic outcomes and fiscal solvency. NPL
was formed in 2005 by the founders of Concept to provide a facilities
solution for charter schools that were administered and managed by
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:
--'Criteria for Rating Charter Schools' (July 19, 2012);
--'Charter School Rating Criteria: Exposure Draft' (July 19, 2012);
--'Revenue Supported Rating Criteria' (June 12, 2012);
--'Charter School Rating Criteria' (Aug. 10, 2011);
--'Fitch Affirms New Plan Learning Inc. Project (OH) Revs at 'BBB-',
Outlook Stable' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Charter School Rating Criteria
Charter School Rating Criteria: Exposure Draft
Revenue-Supported Rating Criteria
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