Fitch Ratings affirms its 'BBB-' rating on approximately The Rating Outlook is Stable.
The bonds are payable from lease payments made by three Alliance- managed charter schools (
Key Rating Drivers
Sound Financial Performance: The three obligated charter schools' track record of operating surpluses; sound coverage of pro forma MADS from current operations; and a manageable, albeit high, debt burden, underpin the 'BBB-' rating. Financial performance is tempered by a balance sheet cushion that is limited, yet acceptable for the rating category.
Stable Demand: The schools maintain full and stable enrollments, bolstered by strong programmatic and fiscal management provided by Alliance, a well-established charter management organization that manages a successful network of 22
Limited Operating History: Counterbalancing the above credit strengths are the schools' relatively limited operating histories, including at or just over five years of audited operating history.
Charter Renewal Success: While their operating histories are limited, the schools now have three charter renewals among them, with the youngest of the three schools having recently been merged into the oldest of the three to form a continuous grade 6-12 program under a single, recently renewed five-year charter.
Management Interruption: Any adverse change or interruption to the existing CMO relationship between Alliance and the schools, while unlikely, would strongly influence the rating.
Charter Related Concerns: A limited financial cushion; substantial reliance on enrollment-driven, per pupil funding; and charter renewal risk are credit risks common among all charter school transactions that, if pressured, could negatively impact the rating over time.
The schools' financial performance remains sound, with each having generated operating surpluses since inception, albeit based on relatively small revenue bases. Operating margins ranged between a healthy 12.9 percent and 21 percent for fiscal 2013, driven largely by prudent budgeting and administrative efficiencies derived through the Alliance network. The schools continue to benefit from the strong financial oversight and budgetary guidance provided by Alliance and stable enrollments which support consistent operating performance. Characteristic of charter schools, revenue diversity is limited with state aid comprising the majority (two-thirds) of funding and federal aid representing another 12 percent-17 percent.
Following significant cuts to state funding of public K-12 education from fiscal years 2009-2012, funding levels were held flat for fiscal 2013 and improved for fiscal 2014, primarily due to voter passage of the governor's tax increase initiative, Proposition 30, in
On a combined basis, the schools' debt burden is high but manageable. Total pro forma MADS (
While joint and several, Fitch notes favorably that on an individual basis, coverage of the schools' internally allotted share of debt service was about 2.5x, 2.2x and 3.2x for Ouchi, Skirball, and O'Donovan, respectively, in fiscal 2013. Fitch considers a track record of over 1x MADS coverage and a debt burden under 15 percent investment grade credit attributes.
Typical of charter schools, the schools' balance sheet resources are limited, though improved slightly in fiscal 2013. On a combined basis, available funds (cash and investments not permanently restricted) totaled
Enrollment at the schools remains stable. Combined enrollment at the three schools is currently 1,465, up slightly from 1,450 the prior year. Ouchi enrolled 575 students in grades 9-12, while Skirball and O'Donovan enrolled 440 and 450 students in grades 6-8, respectively. Given Alliance's goal of maintaining small schools, each school remains at or near its desired capacity and enrollment is not anticipated to vary significantly from current levels. This is viewed favorably by Fitch as no material enrollment growth is planned or needed to meet the schools' financial obligations. In total, Alliance presently manages 22 schools in
In general, Alliance-managed schools continue to outperform their district peers academically as measured by
While the schools continue to mature, Fitch still considers their operating histories as limited. Ouchi, Skirball and O'Donovan have seven, six and five years of audited financial statements, respectively, which is at or just over Fitch's minimum (five-year) expectation for investment grade charter schools. However, Fitch notes that the schools now have three charter renewals among them. Ouchi recently received its second five-year renewal, while Skirball's second renewal will come up in
O'Donovan is the youngest school, having just completed its fifth year of audited financial statements in fiscal 2013 and not undergoing a renewal on its own. However, Alliance merged this school into Ouchi commencing with the current 2013-2014 academic year to form a continuous 6-12 program on the two schools' shared campus. As such, O'Donovan's existing charter was collapsed and Ouchi's charter was revised to incorporate both schools and simultaneously renewed for a further five-year term effective
Fitch continues to take comfort in Alliance's broader reputation and positive working relationship with its schools' authorizer (
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Fitch Ratings affirms its 'BBB-' rating on approximately
The Rating Outlook is Stable.