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 combined basis.
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 percent 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 additional class.
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 charter renewal.
The fiscal 2013 combined operating margin was a positive 2.7 percent. Following several years of operating surpluses, Pinellas Prep's operating margin declined to negative 3.1 percent in fiscal 2013, after averaging a sound 2 percent 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 percent 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 percent 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 percent 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 percent 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 percent and 6.6 percent, respectively. While these metrics increased from fiscal 2012 levels, they are still considered very low.
Additional information is available at 'fitchratings.com'.
Applicable Criteria and Related Research:
--'Charter School Rating Criteria' (Sept. 19, 2012);
--'Fitch Downgrades Pinellas Preparatory Academy (FL) to 'BB' (March 8, 2013).
Applicable Criteria and Related Research:
Charter School Rating Criteria
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