NEW YORK - (Business Wire) Fitch Ratings affirms its 'BBB' rating on approximately $78.4 million of outstanding Pima County Industrial Development Authority education revenue bonds, series 2007A, issued on behalf of the American Charter Schools Foundation (ACSF), a Michigan not-for-profit corporation. The bonds are secured by a joint and several pledge of revenues generated at each of ten charter high school campuses that are owned and operated by ACSF in the Phoenix metro area. Pledged revenues consist primarily of state equalization payments made to ACSF based on enrollment levels. Additional bondholder protections include a deed of trust on each facility, fully funded debt service reserve, an additional bonds test, and the required maintenance of a repair and replacement funds. The Rating Outlook is Stable. The 'BBB' rating reflects the strong structural and legal provisions of the financing, the multi-year operating histories of all but one of the charter schools; revenue and enrollment diversity afforded by student headcount and related state payments generated by multiple locations; and limited charter renewal risk due to the 15-year term of the charter contracts. Primary credit concerns include a high debt burden, limited liquidity emblematic of the charter school sector, the vulnerability of financial plan assumptions to unexpected downward trends in enrollment and reductions in state funding.
A key structural component of the bonds is ACSF's irrevocable direction to the Arizona state treasurer to make state equalization payments directly to the trustee for the life of the bonds. ACSF must also fund a repair and replacement fund over six years to its $3 million funding requirement; as of Oct. 31, 2009, the fund balance was $748,369. Nine of ACSF's charter schools have operating histories of six to twelve years; the remaining school opened in fall 2006. On a consolidated basis, the schools have had breakeven operations in four of the past five fiscal years. ACSF's operating margin in fiscal 2008 was a negative 3% primarily due to the expected additional costs associated with its acquisition of the schools and an unexpected mid-year cut in state funding. ACSF's operations improved in fiscal 2009 to a negative 0.3% as a result of the actions taken by management to freeze spending and reduce costs.
ACSF's total fall 2009 ADA count was 4,443 students, an increase of 2% over fall 2006, with improvement at some schools offsetting missed projections at others. Although the schools are under-enrolled compared to original projections due to unexpected declines at two of the schools, enrollment has started to stabilize with positive trends experienced at five of the ten facilities. Enrollment management is a key credit factor as ACSF is dependent upon state equalization payments (represented 88.3% of fiscal 2009 unrestricted revenues), which are based upon enrollment. As attendance rates have improved at the schools, all but one is funded on the higher ADM (average daily membership) count rather than at the lower reimbursed ADA (average daily attendance) count.
ACSF has weak liquidity and a high debt burden, as is common for the charter school sector. The foundation's fiscal 2009 unrestricted cash of approximately $1.3 million represented 3.7% of operating expenses and 1.6% of total debt. However, Fitch does acknowledge that ACSF's restricted cash reserves totaled approximately $6.2 million for the same period. The foundation's total debt in fiscal 2009 was $78.6 million, for which maximum annual debt service (MADS) of $5.6 million represented 16.3% of total fiscal 2009 revenues.
The foundation has contracted with Leona Arizona Management, L.L.C (Leona) to manage its schools. Part of the nationally recognized Leona Group, Leona is the largest education management organization in the state of Arizona serving approximately 6,500 students at the middle and high school grade levels. Leona's favorable reputation stems from strong, committed leadership and positive academic outcomes among students served. Leona has contractually agreed to defer its management fees in the event cash flows are insufficient to meet annual debt carrying charges.
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Fitch Ratings, New York
Douglas J. Kilcommons, 212-908-0740
or
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Email: cindy.stoller@fitchratings.com
