News Column

Fitch Affirms Belle Chasse Academy (LA) at 'BBB'; Outlook Stable

February 21, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed its 'BBB' rating on approximately $20.2 million of outstanding Louisiana Public Facilities Authority revenue bonds, series 2011 issued on behalf of Belle Chasse Educational Foundation (the foundation).

The Rating Outlook is Stable.

SECURITY

The bonds are payable by the foundation through lease payments received from Belle Chasse Academy (BCA), a charter school located on Naval Air Station-Joint Reserve Base New Orleans (the base). Lease payments constitute a general obligation of the school, payable from all legally available funds. The bonds are further secured by a leasehold mortgage over BCA's facilities and a cash-funded debt service reserve sized to maximum annual debt service (MADS).

KEY RATING DRIVERS

STABLE OPERATIONS: The 'BBB' rating reflects BCA's 11-year operating history, with full and stable enrollment; consistently positive operating results; and adequate balance sheet resources. Counterbalancing credit factors include recent reductions in state per pupil funding levels and a high debt burden.

STEADY DEMAND: Student attrition resulting from periodic turnover of on-base military personnel is well managed and has not adversely impacted enrollment levels historically. Enrollment stability is further underpinned by the solid academic performance of BCA students.

HIGH, BUT MANAGEABLE BURDEN: Typical of charter schools, BCA maintains a high debt burden. However, this remains partially offset by the school's track record of over 1x pro forma MADS coverage from net operating income and adequate balance sheet cushion.

RATING SENSITIVITIES

CHARTER RELATED CONCERNS: 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.

FEDERAL BUDGET: BCA's location on a military base makes it susceptible to decisions related to military staffing and location, including but not necessarily due to federal deficit reduction actions. However, Fitch does not presently anticipate any actions that would have a materially adverse impact on BCA's credit profile.

CREDIT PROFILE

Opened in 2002, BCA serves grades K-8 and was the first charter school established on a military installation. Its initial five-year charter was granted in 2001 by the Louisiana State Board of Elementary and Secondary Education (BESE) and was renewed for 10 years in 2007. BCA students continue to score well on the Louisiana Educational Assessment Program tests and BCA generally meets or exceeds adequate yearly growth based on BESE's school performance score, receiving an 'A' letter grade from BESE for the 2012-2013 academic year. BCA's limited charter renewal history is partially mitigated by the 10-year term of its charter, the solid academic performance of its students, and the positive relationship it maintains with its authorizer.

OPERATIONS SUPPORTED BY ENROLLMENT STABILITY

BCA currently enrolls 936 students in grades K-8, down from 951 students at this time last year (Feb. 1, 2013 count). Fitch notes that the school's enrollment generally fluctuates during the year due to shifts in the base's population. The school enrolled 948 students at the start of the 2013-2014 school year. BCA maintains an actively managed waiting list, 140 students presently, which is available to fill vacancies arising as a result of routine military deployments/relocations. BCA's ability to minimize the impact of such enrollment turnover is viewed positively by Fitch. Moreover, the base's growth over the past few years reflects the strategic role it plays in the southeast region of the country. It also partially mitigates concerns regarding any future Base Realignment and Closure Commission or other federal deficit reduction actions.

BCA generated operating surpluses for each of the past five fiscal years, with an average operating margin of 6.6%. Operations have been driven largely by stable enrollment and a relatively favorable funding environment. However, operating performance, while still solid, softened in fiscal 2013 with the school generating a 5.9% operating margin compared to 8.9% in fiscal 2012. The decline was due primarily to a fiscal 2013 reduction in state per student funding to $13,229 from $13,545 in fiscal 2012.

Management anticipates another operating surplus for fiscal 2014 but likely less than the fiscal 2013 level due to a further reduction in funding to $13,060 per student. Based on unaudited interim results as of Dec. 31, 2013, revenues of $7.16 million are trending slightly behind the Dec. 31, 2012 level of $7.25 million. However, expenses are also trending below the prior year's level. While the lower funding level has pressured operating performance, BCA's stable enrollment trends, healthy level of per student funding increases prior to fiscal 2013, and adequate balance sheet cushion provide it some flexibility to manage reduced funding.

Other budgetary actions BCA can take to offset lower funding include adjusting staff headcount, adding students from its waiting list, and utilizing cash reserves, if needed. BCA has capacity to enroll up to 1,200 students under its existing charter, although it does not presently plan to grow to this level due to physical plant constraints and current staffing levels. Due to its high reliance on per student funding provided by the state (79% of fiscal 2013 operating revenues), Fitch continues to view enrollment stability as a key determinant of the Stable Rating Outlook.

ADEQUATE BALANCE SHEET CUSHION

BCA's balance sheet resources continue to provide an adequate financial cushion to manage unexpected increases in operating expenditures and/or decline in enrollment-related per pupil funding. Available funds (defined as cash and investments not permanently restricted) totaled $5.9 million as of June 30, 2013, down slightly from $6.2 million as of June 30, 2012. Available funds covered fiscal 2013 operating expenses ($16 million) and outstanding debt ($20.1 million) by 36.6% and 29.1%, respectively. While modest, these liquidity metrics are respectable for a sector typically characterized by very limited balance sheet resources.

HIGH, BUT MANAGEABLE DEBT BURDEN

Pro forma debt service ($1.6 million) is level through final maturity of the bonds in fiscal 2041 and represented 9.5% of fiscal 2013 operating revenues of $17 million. While a 9.5% debt burden is considered high, it is lower than that of many other charter schools presently rated by Fitch. Based on BCA's track record of operating surpluses and lack of additional debt plans, Fitch expects the school's debt burden to remain manageable. Outstanding debt to net income available for debt service was a moderately high 7.9x for fiscal 2013, also comparing favorably to most other Fitch-rated charter schools.

In addition, BCA generated sound MADS coverage from operations of over 1.5x in each of the past three fiscal years. For fiscal 2013, MADS coverage was a solid 1.6x based on net income available for debt service of $2.5 million. For the charter school sector, Fitch considers a debt burden under 15% and a track record of over 1x MADS coverage as investment grade credit attributes.

The Fine Arts Center that was constructed with proceeds of the series 2011 bonds opened in July 2013, one year behind schedule as a result of Hurricane Isaac in August 2012. BCA and the project's general contractor are in ongoing settlement negotiations over the contractor's claim of approximately $735,000 owed under the construction contract. The school has recorded a retainage payable to cover this and built a $1 million contingency into its budget. BCA hopes to resolve this matter soon with terms favorable to the school. Fitch will continue to monitor the outcome of any settlement and its credit impact on BCA.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

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

--'Fitch Affirms Belle Chasse Academy (LA) at 'BBB' (March 8, 2013).

Applicable Criteria and Related Research:

Charter School Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821313

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Media Relations

Elizabeth Fogerty, New York

Tel: +1 212-908-0526

Email: elizabeth.fogerty@fitchratings.com

or

Primary Analyst

Colin Walsh

Director

+1-212-908-0767

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Secondary Analyst

James George

Director

+1-212-908-0652

or

Committee Chairperson

Joanne Ferrigan

Director

+1-212-908-0723


Source: Fitch Ratings


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