News Column

Fitch Affirms Premier Charter School, MO's Revs at 'BBB'; Outlook Stable

February 11, 2014

Fitch Ratings has affirmed the 'BBB' rating on the Missouri Health and Educational Facilities Authority's$4.1 million series 2002A revenue bonds issued on behalf of Premier Charter School (PCS, formerly St. Louis Charter School).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge and a leasehold mortgage over the school's facility. Additional security is provided by a cash-funded debt service reserve fund, a supplemental debt service reserve fund, and an intercept mechanism that directs state and federal funds directly to the trustee prior to being made available to the school for operations.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'BBB' rating primarily reflects a track-record of consistently positive GAAP-based financial results; healthy demand profile, which encompasses stable enrollment trends and an actively managed waiting list; favorable leverage position; and long operating history with a track-record of multiple charter renewals.

HISTORY OF POSITIVE OPERATING PERFORMANCE: PCS registered its sixth consecutive positive operating margin in fiscal 2013, reflecting prudent fiscal management and stable enrollment trends. While a strategic reduction in student enrollment for fall 2013 has reduced total operating revenues in fiscal 2014, proactive budgetary adjustments and careful expense management is expected to support satisfactory year-end operating performance.

MANAGEABLE LEVERAGE POSITION: The school's debt burden, which ranks among the lowest of all charter school's rated by Fitch, is regularly covered by at least two times (x) from net operating income. There are no concrete new money debt plans over the near term.

RATING SENSITIVITIES

STANDARD SECTOR CONCERNS: A modest 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.

DEBT MANAGEABILITY: While not expected at the present time, any material, adverse change in the school's leverage metrics could yield negative rating pressure.

CREDIT PROFILE

Established in 2000, PCS is located in the city of St. Louis (rated 'AA-' with a Stable Outlook by Fitch) and offers classes in kindergarten through eighth grade. PCS' charter was last renewed in 2010 for a period of 10 years, the maximum allowable under Missouri's charter school law at the time.

HISTORY OF POSITIVE OPERATING PERFORMANCE

PCS' GAAP-based operating performance has been consistently positive over the past five fiscal years (2009-2013), averaging 5.3 percent inclusive of a 7.7 percent margin in fiscal 2013. Favorable year-over-year financial results on a full accrual basis are supported by prudent financial planning, which includes conservative per pupil funding forecasts, careful expense management, and multi- year forecasting.

Positive operating performance has driven continued growth in the school's unencumbered financial resources. PCS' available funds, defined by Fitch as unrestricted cash and investments, increased from $924,000 in fiscal year-end 2009 to around $2.5 million in fiscal year-end 2013. Fiscal year-end 2013 available funds covered fiscal 2013 annual operating expenses by 23.8 percent and long-term debt by 60.5 percent. Both metrics are considered satisfactory for an investment-grade charter school.

Nearly all of PCS' revenues are tied to student enrollment, which underscores the importance of maintaining healthy student demand and steady headcount trends. PCS' student demand is supported by its favorable academic performance on standardized state exams relative to the local school district (St. Louis Public Schools, or SLPS). In academic year 2012-13, the percentage of PCS and SLPS students across all grade levels achieving proficient or advanced status in Communication Arts was 43.9 percent and 28 percent, respectively, in Mathematics, 39.8 percent and 25.4 percent, respectively, and in Science, 41.7 percent and 24.7 percent, respectively. The year-to- date waitlist for academic year 2014-15 is 437, further highlighting PCS' solid student demand.

Following some enrollment growth in recent years to help offset a pressured state funding environment (Missouri GO bonds are rated 'AAA' with a Stable Outlook by Fitch), management made the strategic decision to reduce total headcount enrollment to 899 in academic year 2013-14 (from 968 in 2012-13) and is intent on maintaining this level for the next few years. The objective behind management's decision to decrease headcount enrollment is to positively impact student outcomes by reducing the student-teacher ratio. While the enrollment reduction will decrease total operating revenues in fiscal year-end 2014, proactive budgetary adjustments and careful expense management is expected to help the school maintain satisfactory operating results. Importantly, despite the near-term revenue loss, Fitch notes that capacity for enrollment growth affords the school additional financial flexibility in future years.

MANAGEABLE LEVERAGE POSITION

PCS' series 2002A bonds are structured such that annual debt service is approximately $488,000 per year through fiscal 2022, followed by a final maximum annual debt service (MADS) payment of $993,000 in fiscal 2023. Similar to many other charter transactions, PCS plans to utilize the debt service reserve fund (DSRF) of $500,000 to lessen the impact of the final maturity payment.

In calculating leverage ratios, Fitch considers transactional MADS debt burden and coverage, or MADS adjusted for the DSRF. PCS' transactional MADS of $493,000 represented a relatively low 4.3 percent of fiscal 2013 operating revenues. This has been covered over two times by net operating income in each of the past five fiscal years (2009-2013), including 3.4x in fiscal 2013. Additionally, PCS' pro forma debt to net income available for debt service was 2.5x in fiscal 2013, which further underscores debt manageability. These ratios rank among the strongest of all Fitch rated charter schools.

Additional information is available at 'fitchratings.com'

Applicable Criteria and Related Research:

--'Charter School Rating Criteria', dated Sept. 19, 2012;

--'Fitch Upgrades St. Louis Charter School (MO) to 'BBB', dated March 8, 2013.

Applicable Criteria and Related Research:

Charter School Rating Criteria

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=688957

Additional Disclosure

Solicitation Status

http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=818939

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