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Fitch Affirms American Charter Schools Foundation (MI) at 'BB'

February 3, 2014

CHICAGO --(BUSINESS WIRE)-- Fitch Ratings affirms the rating on approximately $75.7 million of series 2007A bonds issued by the Pima County Industrial Development Authority , Arizona (PCIDA) at 'BB'. The bonds were issued on behalf of the American Charter Schools Foundation (ACSF). The Rating Outlook is Stable. SECURITY The bonds are secured by a joint and several pledge of the revenues of the 10 ACSF schools (collectively, the schools), which primarily consist of state aid based on enrollment. The bonds are additionally secured by a debt service reserve (DSR). The school also makes annual renewal and replacement deposits. Charter payments from the state are made directly to the bond trustee. The annual debt service coverage requirement is 1.0x sufficiency; a higher coverage level is required for issuance of additional bonds. KEY RATING DRIVERS WEAK FINANCIAL PROFILE: The rating reflects a history of break-even to slightly negative GAAP operations, a very limited financial cushion, a high debt burden and adequate, albeit limited, coverage of transaction maximum annual debt service (TMADS). ACSF's financial profile demonstrates characteristics consistent with a speculative grade rating. ENROLLMENT ISSUES PERSIST: Aggregate enrollment at the schools grew modestly in fall 2013, following 4% growth in fall 2012, but three consecutive years of declines before that. While the 10 bond schools have stabilized as a group, enrollment trends remain uneven among them. STRUCTURAL BONDHOLDER PROVISIONS: Legal and structural security measures include a trustee intercept of state aid. This provides for payment of debt service before any pro-rata distribution of revenues to the schools, and contractual subordination of the charter management organization's (CMO) fee. RATING SENSITIVITIES MARGIN DETERIORATION: Should ACSF's operating margin deteriorate for any reason, causing TMADS coverage to fall below 1.0x or further weaken balance sheet resources, negative rating pressure is likely. STANDARD SECTOR CONCERNS: A limited financial cushion, substantial reliance on enrollment-driven, per-pupil funding and charter renewal risk are credit concerns common among all charter school transactions which, if pressured, could negatively impact the rating over time. CREDIT PROFILE ACSF is composed of 10 high schools, nine of which operate in the Phoenix, AZ metropolitan area. The tenth school operates in Tucson . All of the 10 bond schools are alternative schools except for Alta Vista High School . The schools maintain independent charters from the Arizona State Board of Charter Schools . Each charter has a 15-year term (which is standard in Arizona ) and expires in 2017 or 2018, depending on the school. The ACSF bond schools each maintain management agreements with the Leona Group , one of the largest CMOs in the state of Arizona . At this time, Leona manages 70 charter schools nationwide, including 27 in Arizona (including the 10 bond schools), 23 in Michigan , 11 in Ohio , and several in Indiana and Florida . Leona maintains its headquarters in Michigan . In Arizona , ACSF/Leona expects to open two new elementary charter schools in fall 2015, as well as a new preparatory high school. SLIM OPERATING PERFORMANCE The 'BB' rating indicates an overall financial profile that Fitch considers to be consistent with a non-investment-grade rating. ACSF's GAAP operating margin was negative 1.1% in fiscal 2013, which compared to negative 1.3% in 2012, and negative 0.5% in 2011. The margin has averaged negative 0.8% between fiscal years 2008-2013. Fitch adjusted fiscal 2012 results to exclude certain accounting changes artificially inflated operating results. The ACFS bond schools, as a group, have generated slim but positive transactional MADS coverage in the last five years. Fitch defines TMADS as maximum annual debt service excluding a balloon payment in the last maturity typically funded from the DSR. TMADS coverage was 1.1x for the fiscal year ended June 30, 2013 , which compares to 1.1x or 1.2x in the previous four fiscal years. For the current 2014 budget year, the CMO expects operating results to be similar or slightly stronger than fiscal 2013. LIMITED BALANCE SHEET In addition to slim operating results, ACFS has a limited balance sheet, both of which demonstrate limited operating flexibility. Available funds, defined as cash and investments not permanently restricted, declined to $994,000 , down from $1.37 million in fiscal 2012. Fiscal 2013 available funds represented just 2.9% of operating expenses ( $34.3 million ) and 1.8% of outstanding debt ( $76.9 million at that time). Fitch considers these balance sheet ratios low for the rating category. HIGH DEBT BURDEN ACSF's slim operating performance and balance sheet exacerbate concerns about the foundation's high debt burden. TMADS of $5.6 million represented 16.4% of fiscal 2013 operating revenues, consistent with recent years. Fitch's criteria consider a debt burden exceeding 15% to be a speculative grade attribute. ENROLLMENT ISSUES LIMIT BUDGET IMPROVEMENT In both fall 2013 and fall 2012, the CMO successfully increased aggregate enrollment across the bond schools, by 0.4% and 4.3%, respectively. Fitch views this turnaround positively given that the aggregate student population declined in each of the prior three enrollment cycles (fall 2009, 2010 and 2011). Enrollment growth among the 10 schools continues to be uneven, with growth in six high school offsetting declines in others. Management reports continued focus on growing enrollment where capacity exists for it (some schools are at capacity). The persisting enrollment issues are reflected in the 'BB' rating. Additional information is available at ' ' Applicable Criteria and Related Research : --'Charter School Rating Criteria' ( Sept. 19, 2012 ); --'Revenue-Supported Rating Criteria (June, 2013); -- Fitch Downgrades American Charter Schools Foundation (MI) to 'BB', dated March 3, 2013 Applicable Criteria and Related Research : Revenue-Supported Rating Criteria Charter School Rating Criteria Additional Disclosure Solicitation Status 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 Primary Analyst: Susan Carlson , +1-312-469-2092 Director Fitch Ratings, Inc. , 70 West Madison Street Chicago, IL. 60602 or Secondary Analyst: Colin Walsh , +1-212-908-0767 Director or Committee Chairperson: Joanne Ferrigan , +1-212-908-0723 Director or Media Relations: Elizabeth Fogerty , New York , +1 212-908-0526 Source: Fitch Ratings

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