NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has affirmed its 'BB' rating on the following series of
bonds issued by the Pinellas County Educational Facilities Authority on
behalf of Pinellas Preparatory Academy, Inc. (PPA, Inc.):
--$8,670,000 revenue bonds series 2011A;
--$110,000 revenue bonds series 2011B (taxable).
The Rating Outlook is Stable.
The bonds are a general obligation of PPA, Inc., which operates Pinellas
Preparatory Academy (Pinellas Prep), a charter school serving grades
4-8, and Pinellas Primary Academy (Pinellas Primary), a charter school
serving grades K-3 located in Largo, Florida. The bonds are further
secured by a first mortgage lien over the facility in which the schools
are co-located and a cash-funded debt service reserve.
KEY RATING DRIVERS
STABLE OPERATIONS: The 'BB' rating reflects Pinellas Prep's 11-year
operating history, with multiple charter renewals; track record of
enrollment growth, coupled with solid demand for Pinellas Primary; and
generally positive operating results.
PINELLAS PRIMARY'S LIMITED HISTORY: Pinellas Primary's limited two-year
operating history currently limits the rating. Per Fitch's charter
school rating criteria, the calculation of debt service coverage
therefore only includes Pinellas Prep. Transaction maximum annual debt
service (TMADS) coverage on the series 2011 bonds from Pinellas Prep
alone was just 0.6x in fiscal 2013. TMADS coverage rises to over 1x on a
STANDARD SECTOR CONCERNS: Additional credit concerns include revenue
concentration, a weak balance sheet cushion and a high debt burden, all
of which are characteristic of the charter school sector.
ACHIEVEMENT OF FINANCIAL METRICS: Pinellas Prep's achievement of certain
financial metrics, principally TMADS coverage, or on a combined basis
once Pinellas Primary reaches five years of audited operating history
with at least one charter renewal, could yield upward rating momentum.
Pinellas Primary's initial charter expires in 2016.
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 schools that, if
pressured, could negatively impact the rating over time.
One of PPA, Inc.'s key credit strengths remains Pinellas Prep's
operating track record. Pinellas Prep is in its twelfth academic year
and has had its charter renewed three times to date, most recently in
2010 for a 15-year period. Fitch views the school's operating history
and multiple renewals, coupled with its 15-year charter term, favorably.
Pinellas Primary is still operating under its initial five-year charter
that was granted in 2011. Fitch notes positively that both schools
remain in good standing under their respective charters and continue to
maintain a positive working relationship with their authorizer, Pinellas
County School Board (PCSB).
DEMAND SUPPORTED BY SOLID ACADEMICS
Pinellas Prep currently enrolls 436 students in grades 4-8 and Pinellas
Primary enrolls 324 students in grades K-3. On a combined basis,
enrollment was exactly the same as last year, which was expected due to
the enrollment caps imposed by the schools' charters. While Pinellas
Prep's current charter caps enrollment at 440 students, the school
intends to increase enrollment by 22 students (or one class size) for
the 2014-2015 academic year. In Florida, state statute permits charter
schools designated as high performing (which Pinellas Prep is) to expand
enrollment by 15% without requiring authorizer approval. The schools
maintain actively managed waiting lists, with a total of 441 students
wait-listed as of November 2013; 266 for Pinellas Prep and 215 for
Pinellas Primary. Fitch views the schools' nearly full enrollment and
sizeable wait lists as reflective of the community need and demand for
its programs and should enable Pinellas Prep to easily fill an
Academic performance at the schools remains solid. The schools' average
scores on Florida's Comprehensive Assessment Tests continue to exceed
the state and Pinellas County district average. Pinellas Prep retained
its 'A' letter grade from the Florida Department of Education, and,
while Pinellas Primary does not receive a grade due to the lower grades
its serves, its third grade students continue to perform well (third
grade being the first year of student testing). The schools' favorable
academic results, coupled with Pinellas Prep's operating track record,
continue to partially offset the sector-standard concern related to
The fiscal 2013 combined operating margin was a positive 2.7%. Following
several years of operating surpluses, Pinellas Prep's operating margin
declined to negative 3.1% in fiscal 2013, after averaging a sound 2%
over the prior five fiscal years (2008-2012). The decline in performance
was due partly to a one-time accounting reclassification following
transfer of the school's before- and after-care program revenues to
Pinellas Primary, as well asa softening in gift revenue. However,
Pinellas Primary generated a solid 9.7% margin in fiscal 2013 following
a deficit in its inaugural fiscal 2012.
Management anticipates Pinellas Prep to return to profitability in
fiscal 2014, aided by an approximate 2.5% increase in state per pupil
funding (Fitch rates Florida GOs 'AAA' with a Stable Outlook). Pinellas
Primary's operating margin is expected to tighten but remain positive in
fiscal 2014, as it reached full staffing levels. The recommended state
budget forecasts revenue growth in fiscal 2015, which should boost
educational funding statewide and lend further stability to the schools'
funding profile. Similar to most charter schools, per pupil funding
makes up the majority of the schools' revenue (87.1% on a combined basis
in fiscal 2013).
HIGH DEBT BURDEN
The schools' financial leverage remains high, as measured by pro forma
MADS coverage and burden. TMADS consumed a high 14.6% of the schools'
combined fiscal 2013 operating revenues of $5.1 million. Total debt
outstanding of about $8.8 million also represents a high 9.2x of
combined net income available for debt service of $958,000. While these
metrics continued to reflect high leverage position, they improved from
fiscal 2012 levels. Improvement was mostly attributed to growth at
Pinellas Primary as it continued to ramp up enrollment following its
2011 opening and stabilized state per pupil funding after a significant
cut in fiscal 2012. Moreover, the extra class to be added, increase in
state funding, and lack of additional capital needs should cause the
debt burden to moderate over time.
Pinellas Prep is unable to cover the carrying charges on the series 2011
bonds with its current financial resources despite a track record of
enrollment growth, solid academic performance and operating surpluses.
Pinellas Prep's fiscal 2013 net income available for debt service of
$467,000 covered TMADS of $738,000 by only 0.6x, which is similar to the
fiscal 2012 level. Under Fitch's charter school rating criteria, a
school having less than five years of audited operating history and no
charter renewal is excluded from this calculation in pooled transactions.
Pinellas Primary has experienced strong demand to date and benefits from
its affiliation with Pinellas Prep despite having completed only two
full academic years under its initial charter. Fitch notes that when
incorporating Pinellas Prep into the debt service calculation, TMADS
coverage improved to an adequate 1.3x for fiscal 2013, which meets the
debt service coverage covenant of 1.1x.
Fitch views continued enrollment stability and breakeven-to-positive
operations critical as the schools' balance sheet resources provide
little financial flexibility. On a combined basis, available funds (cash
and investments not restricted) totaled just $584,000 as of June 30,
2013, which is up from $361,000 as of June 30, 2012. Available funds
covered fiscal 2013 operating expenses ($4.9 million) and outstanding
debt ($8.8 million) by 11.8% and 6.6%, respectively. While these metrics
increased from fiscal 2012 levels, they are still considered very low.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Charter School Rating Criteria' (Sept. 19, 2012);
--'Fitch Downgrades Pinellas Preparatory Academy (FL) to 'BB' (March 8,
Applicable Criteria and Related Research:
Charter School Rating Criteria
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