Fitch has removed the ratings from Rating Watch Negative and assigned the bonds a Negative Outlook.
The revenue bonds are secured by a pledge of FOCUS' gross revenues, a cash-funded debt service reserve and a mortgage on property and facilities.
KEY RATING DRIVERS
CHARTER RENEWAL APPROVED: The removal from Rating Watch Negative reflects FOCUS' charter renewal from the
WEAK FINANCIAL METRICS: The Negative Outlook reflects the Academy's speculative grade financial metrics, failure to meet the 1.1x debt service coverage covenant in fiscal 2013, and expected resolution of covenant violations in the fiscal year ending
ENROLLMENT CHALLENGES IMPACT MARGINS: The Academy's enrollment fell short of expectations in both fiscal years 2013 and 2014. Expenses were adjusted, and at this time fiscal 2014 interim results indicate a small operating surplus that achieves financial covenants. Enrollment for fall 2014 (fiscal 2015) is not finalized, but preliminary results indicate some growth.
GOVERNANCE LACKS INDEPENDENCE: While demonstrating effective management, overlap between FOCUS' board of directors and day to day administration team weakens the independent oversight mechanism that Fitch's criteria expect to be present in an investment grade charter school.
IMPROVED OPERATIONS AND COVERAGE: The Academy's inability to return to break-even to positive operating margins and achieve covenant compliance could cause a rating downgrade.
STANDARD SECTOR CONCERNS: A modest financial cushion, substantial reliance on state per pupil funding, and charter renewal risk are credit concerns common in all charter school transactions that, if pressured, could impact the rating over time.
STABILIZED ENROLLMENT: Stabilized or modestly growing enrollment, in conjunction with conservative operating budgets and consistently balanced operating results, are needed to maintain the 'BB+' rating long-term.
ENROLLMENT TARGETS ADJUSTED
FOCUS's fiscal 2014 budget reflected the initial enrollment of 871 students. In past years, the Academy used overly optimistic budget and enrollment assumptions. When enrollment growth flattened in fiscal 2013 and declined slightly in fiscal 2014, expenses were not implemented in a timely fashion. The Academy's ability to budget more conservatively is expected going forward.
OPERATIONS EXPECTED TO IMPROVE IN FISCAL 2014
FOCUS's operating revenues are largely reliant on state per pupil funding. While fiscal 2014 results are expected to reflect another modest decline in enrollment, this is partially offset by slight state funding improvement, expense containments, and the positive effect of federal grant revenue, which grant is expected to be completely spent during fiscal 2015. Fiscal year end is
Management reports a 3% increase in per-pupil state funding for fiscal 2015, but also notes that employer pension contributions rose to 1.5%, from zero previously. Further state-mandated increases in charter school pension contribution requirements beyond fiscal 2015 could create additional budget pressure, which Fitch will monitor.
WEAK LIQUIDITY AND COVERAGE VIOLATION
Available funds declined to
Fitch's ratio of long term debt to net income available, which measures years of debt-financed cash flow, weakened to 14x in fiscal 2013 from 8.7x in FY12, further reflecting operational weakness. The Academy's debt burden (MADS as a percent of operating revenue) of 8.9% is moderately high, but stronger than most Fitch rated charters. Annual debt service obligations are approximately level through final maturity in 2041.
The Academy has long-term plans for facility expansion, assuming enrollment growth. Fitch is concerned that additional debt plans would further pressure Focus' balance sheet resources. Issuance of additional debt or loans, without a return to operating surpluses and growth in balance sheet resources, would be viewed negatively.
Additional information is available at 'www.fitchratings.com'.
--'Charter School Rating Criteria' (
--'Revenue-Supported Rating Criteria' (
--'Fitch Places FOCUS Learning Academy on Rating Watch Negative',
Charter School Rating Criteria
Revenue-Supported Rating Criteria
Source: Fitch Ratings
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