Fitch Ratings has downgraded to 'BBB' from 'A' and removed from Rating
Watch Negative its rating on approximately $7.7 million in outstanding
charter school revenue bonds, series 2009, for the Colorado Educational
and Cultural Facilities Authority. The bonds are issued on behalf of
Crown Pointe Academy of Westminster project .
The Rating Outlook is Stable.
The bonds are general obligations of Crown Pointe Academy (CPA), secured
by a first mortgage lien over CPA's facility. A cash-funded debt service
reserve provides additional bondholder protection.
KEY RATING DRIVERS
STATE MORAL OBLIGATION: The 'BBB' rating is based on CPA's inclusion in
the state of Colorado's charter school moral obligation program (the
program), which provides a mechanism for the state to restore draws on
the school's debt service reserve fund.
LEVERAGE METRICS DRIVE DOWNGRADE: The downgrade primarily reflects CPA's
high leverage position, evidenced by a high net income available to
cover pro-forma debt metric and a pro-forma transaction maximum annual
debt service (TMADS) that is typically at or above 15%, coupled with
just adequate coverage of TMADS; 1 times (x) in fiscal 2012.
SOUND OPERATING PROFILE: CPA's 15-year operating history, with multiple
charter renewals and growing enrollment; track record of positive
operating margins; and an adequate level of balance sheet resources
counter the above concerns and result in an investment grade credit
STRONG STRUCTURAL AND LEGAL PROVISIONS: Structural and legal provisions
providing strong bondholder protection include the state's debt service
intercept program and various reserve funds, reflecting a favorable
statutory environment for charter schools.
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 school transactions
that, if pressured, could negatively impact the rating over time.
STATE MORAL OBLIGATION PROGRAM
Under the program, if a charter school draws on its debt service reserve
fund and fails to replenish it immediately, the authority shall submit a
certificate to the Governor certifying the amount necessary to restore
the reserve fund to its requirement. The Governor shall then submit a
request for appropriations to the legislature in an amount sufficient to
restore the reserve fund. The general assembly then, at its discretion,
may appropriate to restore the reserve fund.
In order to qualify for the program, a school must merit an investment
grade credit profile at the time of bond issuance, and participate in
the Colorado Charter School Intercept Program. Under the intercept
program, the state Treasurer pays a portion of the school's monthly per
pupil revenue distribution directly to the trustee in amounts sufficient
to pay debt service requirements.
The rating builds upon Fitch's view of the underlying credit quality of
the charter school (bottom-up analytic approach). Moral obligation
program bonds are secured separately by each school. Fitch views each
bond as project-specific. The state is actively engaged in debt
issuances under the moral obligation program. The statute provides clear
mechanisms to trigger the state's moral obligation. In addition to the
moral obligation, the statute also provide an additional backstop (the
state charter school debt service reserve fund, or CSDSRF) so that an
additional appropriation due to a debt service reserve draw down is less
likely to be necessary.
HIGH DEBT BURDEN
Pro forma MADS of about $1 million represents a very high 34.1% of
fiscal 2012 operating revenues. CPA's debt service schedule follows the
fairly typical charter school structure which incorporates a large final
year payment, with the intent of using the balance of the debt service
reserve to offset this payment. Therefore, Fitch also looks at TMADS,
which excludes the final year payment, as a better indicator of typical
debt service costs over the life of the bonds. This translates to
approximately $505,000, resulting in a high 17% burden. Total debt
outstanding to fiscal 2012 net income available for debt service was
also very high at 14.5x.
CPA has been able to cover TMADS from operations for the past three
fiscal years, which Fitch views favorably. However, coverage was just
adequate at 1x in fiscal 2012 based on net income available for debt
service of $529,000. Fitch considers TMADS coverage of just 1x and a
debt burden of 15%-20% high speculative grade credit attributes.
CPA's limited balance sheet resources are reflected in its available
funds (cash and investments not permanently restricted) which totaled
$1.45 million as of June 30, 2012. However, available funds covered
fiscal 2012 operating expenses ($2.94 million) and debt ($7.66 million)
by a respectable 49.2% and 18.9%, respectively. Balance sheet resources
are expected to remain limited, yet stable. Nonetheless, CPA's liquidity
metrics are stronger than those of most other charter schools rated by
Fitch and partially mitigate concern over CPA's high debt burden and
modest debt service coverage.
STABLE DEMAND FUELS SOUND OPERATING PERFORMANCE
Student demand for CPA remains stable and the school maintains an
actively managed waiting list of 426 students for the 2012-2013 school
year. For 2012-2013, total enrollment grew to 433 students in grades K-8
from 415 the prior year. CPA's funded pupil count is 416 (compared with
393 the prior year). CPA has added classes to each grade in phases over
the past few years. A second seventh grade class was added for the
2012-2013 school year, with a second eighth grade class expected to be
added for 2013-2014. Given recent enrollment patterns and demand to
date, Fitch believes CPA's enrollment targets are reasonable.
Enrollment growth has enabled CPA to generate consistent operating
surpluses. While still positive, the operating margin fell to 1.3% in
fiscal 2012 from 23.4% in fiscal 2011 due to one-time capital grants and
contributions received in fiscal 2011. Typical of charter schools, CPA's
primary funding source is per pupil revenue (PPR) received from the
district, which represented a high 89.3% of the school's fiscal 2012
CPA's dependency on enrollment-related PPR and its relatively small
size, results in limited revenue flexibility and emphasizes the need to
carefully manage enrollment. Following modest state cuts over the past
few years, PPR will remain relatively flat for fiscal 2013 at
approximately $6,732. No further cuts to public K-12 education are
anticipated at this time.
CPA's successful operating history continues to be reflected in its
students' scores on state assessment tests, which generally meet or
exceed proficiency. In addition, while CPA is subject to the sector
standard charter renewal risk, this concern is partially mitigated by
CPA's track record of charter renewals, having received its third,
five-year charter renewal in 2010 from Adams County District No. 50 (the
district). Fitch spoke with a representative from the district, who
stated the relationship with CPA remains positive and cited no issues at
present that would result in non-renewal of the school's charter or
cause disruption to its funding.
Fitch's actions are part of its completed industry-wide review, which
commenced September of last year when Fitch placed all of its rated
charter schools on Rating Watch Negative. Fitch will release an overview
of its rating actions in a separate press release later today.
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:
--'Charter School Rating Criteria' (Sept. 19, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Fitch Places all Charter School Bonds on Rating Watch Negative'
(Sept. 19, 2012).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
Charter School Rating Criteria
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