Fitch Ratings affirms the 'BBB' rating for the following Florida Development Finance Corporation (FDFC) revenue bonds issued on behalf of Renaissance Charter School, Inc. (RCS):
--$57.2 million FDFC educational facilities revenue bonds (RCS projects), series 2010A;
--$10.9 million FDFC taxable educational facilities revenues bonds (RCS projects), series 2010B.
The Rating Outlook is Stable.
SECURITY
The bonds are paid from unrestricted revenues of the financed schools (Renaissance Elementary Charter School, Renaissance Charter School of St. Lucie, North Broward Academy of Excellence, North Broward Academy of Excellence Middle School, and the 2010 Keys Gate Dorm Facility with students from Keys Gate K-8 Charter School and High School). Additional bondholder protections include first liens on four of the facilities, a leasehold interest on the fifth, a debt service reserve fund, and a partial debt service guarantee from Charter Schools USA (CSUSA).
KEY RATING DRIVERS
Enrollment Growth Drives Positive Margin: Student demand remains strong for the financed schools, leading to increased per-pupil revenues from the state. The financed schools generated a combined positive margin in 2010 and unaudited statements forecast another surplus for fiscal 2011.
Weakening State Funding: In fiscal 2012, a significant decrease in state per-pupil funding will pressure financial performance.
Limited Financial Cushion: The financed schools' available funds offer very light protection in the event of operating losses.
Strong Security Provisions: Key structural elements of the transaction, including a favorable flow of funds and subordination of CSUSA's (the education management organization operating the financed schools management fee) continue to benefit bondholders.
Contract Renewals Remain Manageable Risks: CSUSA has a record of regular charter renewals and stable relationships with authorizers. Fitch also anticipates regular renewals of CSUSA's management contracts for the schools in the series 2010 transaction.
WHAT COULD TRIGGER A RATING ACTION
Slow Adjustment To Funding Declines: At the current rating level, the financed schools could likely absorb a slightly negative margin for one year due to decreased state funding. A more substantial, or sustained, loss would likely trigger negative rating action.
Unexpected Enrollment Volatility: Following modest underperformance last year, preliminary data indicates that combined enrollment appears back in line with base case projections for the 2011-2012 school year. Any unanticipated enrollment declines could trigger negative rating action.
CREDIT PROFILE
Stable Performance to Date:
Financial and operating metrics for the financed schools are within Fitch's expectations as outlined in its August 2010 rating assignment. The combined operating margin (inclusive of Keys Gate K-8 Charter School as the 2010 Keys Dorm Facility was not open) remained solidly positive at 6.8% in fiscal 2010. Fitch reviewed unaudited 2011 financial statements for the financed schools and anticipates a positive margin near 5%. 2011 net income available for debt service of $7.1 million covered 1.4 times transaction maximum annual debt service (MADS; as defined in the trust indenture).
The financed schools maintained a stable margin in fiscal 2011 despite significantly lower than projected enrollment at Duval Charter School at Arlington (DCSA). CSUSA attributed the 14.2% enrollment shortfall at DCSA (versus base case forecast in the official statement) to a late start in recruitment for the new school, and the lack of an affiliated high school (RCS opened a new K-12 school in the district for fall 2011). Offsetting lower per pupil revenues, RCS received several hundred thousand dollars in unanticipated state capital outlay funds for DCSA and Renaissance Charter School of St. Lucie (RCSL). RCS also held base salaries essentially flat for a third consecutive year. Legal subordination of CSUSA's management fee provides another potential expense offset that RCS could use in the event of financial volatility. Fiscal 2011 unaudited statements indicate these fees ($3 million) covered approximately 60% of transaction MADS.
CSUSA data as of Aug. 1 projects combined enrollment of 4,520 for the 2011-2012 school year, in line with the base case forecast. However, Fitch notes that last August CSUSA's enrollment projection for DCSA proved too aggressive. Fitch will monitor funded enrollment levels for the coming year, and RCS' ability to absorb any unexpected shortfalls.
Fiscal Pressures Ahead:
The financed schools face an approximately 8% cut in per pupil funding from the state for fiscal 2012. In addition, CSUSA expects to issue a one-time retention bonus to all staff in October. The primary offset for these increased pressures will be a recent statutory decrease in the administrative fee collected by school districts. The change will save over $200,000 for the financed schools in fiscal 2012. However, their fiscal 2012 budgets forecast a modest combined negative margin. Balance sheet resources for the financed schools offer very limited cushion to offset operating losses, with unaudited fiscal 2011 available funds covering just 15.4% of operating expenses and 6.9% of debt. In order to maintain the 'BBB' rating and Stable Outlook, Fitch expects RCS to manage expenses and continue enrollment growth to minimize the fiscal 2012 loss. Fitch will view material erosion of the financed schools' already limited financial cushion negatively.
Charters for the financed schools expire between 2012 and 2026. RCS and CSUSA have never had a renewal application rejected. CSUSA's management contracts for the financed schools transaction expire beginning in 2015, with automatic five-year renewals thereafter. Fitch fully expects regular renewals through final maturity of the series 2010 bonds. Academic performance will likely be a key factor in charter and management contract renewals. Over the past two years, only two of the financed schools received anything lower than a 'B' grade from the state department of education. RCSL earned a 'C' in its first year (2009-2010), but earned an 'A' last year. DCSA also earned a 'C' in its initial year (2010-2011), and CSUSA expects to improve that score in the coming school year. Fitch will closely monitor CSUSA's ability to maintain strong academic and financial performance at the financed schools, particularly as the organization continues its rapid national expansion efforts.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Charter Schools USA.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 20, 2011;
--'Charter School Rating Criteria', dated Aug. 10, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Charter School Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648052
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