Fitch Affirms Aspire Public Schools (CA) School Facility Revs at 'BBB'; Outlook Stable

Fitch Ratings affirms the 'BBB' rating on $93.3 million California Statewide Communities Development Authority series 2010 school facility revenue bonds issued on behalf of Aspire Public Schools (Aspire, or the organization). The Rating Outlook is Stable.

RATING RATIONALE:

--Continued strong demand for Aspire, one of the highest academically performing charter management organizations (CMOs) in California; and a professional, experienced management team underpin the 'BBB' rating.

--Counterbalancing the aforementioned strengths is the possibility of funding reductions from the state of California (the state, general revenue bonds rated 'A-' by Fitch) given its acute fiscal pressures; a very light financial cushion; the organization's mission-based commitment to growing enrollment, which will likely limit operating profitability and balance sheet resources; and industry-standard charter renewal risk, which is mitigated by Aspire's long and successful history.

--Management's ability to comprehensively model and budget for possible reductions in per-pupil revenue serves to partially mitigate concerns regarding state funding.

KEY RATING DRIVERS:

--Consistent achievement of enrollment targets;

--Timely management responses to a fluid state funding environment;

--Measured expansion commensurate with available financial resources.

SECURITY:

The series 2010 bonds are secured primarily by rental payments equal to debt service on the series 2010 bonds; deeds of trust on five of the 10 financed facilities; and partial credit enhancement through a $17 million letter of credit, provided by PCSD Guaranty Pool I, LLC, the sole member of which is Pacific Charter School Development, Inc.

CREDIT SUMMARY:

Aspire enrolled nearly 10,000 students in 30 schools across the state of California during the 2010-2011 school year, including 3,042 in the 10 schools with facilities financed through proceeds of the series 2010 bonds (the financed schools). Enrollment at the financed schools met the growth targets in the organization's base case financial projections, reflecting the strong demand for an Aspire education. Based on strong historical student retention (between 70% - 98%) and the large waitlist for the current school year (nearly 3,000 students), management expects the financed schools to meet enrollment projections in fall 2011 for approximately 20% combined growth. Aspire's strong academic performance remains a key driver of student recruitment. Across all of its managed schools, Aspire averages a very high 9 out of 10 on the state's ranking system that compares academic performance of schools with similar student demographics. Four of the financed schools have the highest rank of 10, while the newer schools are meeting targets for growth in academic performance.

Through prudent management, the organization's leadership has been able to continue investing in academic success while maintaining operating performance. Average daily attendance funding (ADA) from the state remains the dominant source of operating revenues for all Aspire schools (approximately 40% in recent years). Aspire anticipates a modest operating surplus in fiscal 2011 as a conservative ADA budget estimate will offset deferrals of state funding. Management plans a similar approach for fiscal 2012. While the state budget remains unsettled, the 'May Revise' from the Governor's office proposes relatively flat ADA funding. Aspire is budgeting instead for a significant $350 ADA cut (between 6%-7%) based on the Governor's January budget proposal. In addition, Aspire also developed expense management plans in the event of a $650 ADA cut (11%-13%). The organization's proactive financial modeling should help it maintain fiscal stability despite uncertainty in state funding.

Aspire's approach to facility costs, including debt service and lease payments, further reflects management's prudent and thoughtful approach. While the series 2010 bonds are structured as gross unrestricted revenue pledges of the financed schools, Aspire's corporate-level budgeting effectively spreads the costs of facilities across all of Aspire's managed schools to mitigate the financial impacts on any individual school. Gross unrestricted revenues of the financed schools in fiscal 2010 provided nearly 2 times (x) coverage of maximum annual debt service on the series 2010 bonds, with similar coverage anticipated for the current fiscal year based on interim financial statements through March 31 provided by Aspire. The organization's fiscal 2010 system-wide EBIDA covered 2010 total facility expenses of $5.6 million by 1.7x, and is expected to cover 2011 total facility expenses of $7.9 million comfortably given the anticipated operating surplus.

Proactive financial management is especially important given the very thin liquidity cushion. At the end of fiscal 2010, Aspire had just $73,000 of unrestricted cash. To manage its cash flow needs, Aspire worked with the state to market $8 million in revenue anticipation notes (RANs) supported by an intercept of certain state aid. While there is a risk that state aid could be delayed beyond the maturity of the notes, the RANs investors are non-profit financing organizations that would likely work with Aspire to restructure the obligations if needed. Aspire expects to consider alternative cash flow management tools, including a line of credit, in the early part of fiscal 2012.

Aspire remains committed to measured growth to expand its offerings to more students across the state. Four new schools will open in fall 2011, and one is currently planned for fall 2012. Importantly, none of the schools opening this fall will require any additional debt. The fall 2012 school will utilize a state program that includes a $10 million grant and a $10 million low-interest loan to be repaid over 30 years. While continued growth is vital to Aspire's mission of providing a quality education to students across the state, Fitch believes regular expansion will limit the organization's ability to build financial resources.

Founded in 1998, Aspire is one of just two CMOs granted a statewide benefit charter, which allows Aspire to establish a limited number of schools relatively quickly. The statewide authority reflects the organization's strong academic and operational track record and reputation.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated Oct. 08, 2010;

--'Criteria for Rating Charter Schools', dated Jan. 23, 2007.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565

Criteria for Rating Charter Schools

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=311604

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