Fitch Rates $18.1MM American Academy Charter School, CO, Revenue Bonds 'BBB+'

2008-11-08 14:43:04 -

- Fitch Ratings has assigned a 'BBB+' rating to Colorado Educational and Cultural Facilities Authority (the issuer) approximately $18.1 million charter school revenue bonds, series 2008 (the bonds), issued on behalf of the American Academy Charter School (AACS, or the charter school). The fixed-rate 2008 bonds are expected to price via negotiation the week of Nov. 17. The Rating Outlook is Stable.

The 'BBB+' rating reflects the state's commitment to public education funding; the strong structural and legal provisions of the bonds; AACS's full and stable enrollment with a substantial waiting list; a positive, albeit limited, operational history; and compelling academic record. Additional transaction strengths include reasonable assumptions underpinning the school's financial projections, and the prominent role played by AACS's strong and proactive management team. Primary credit concerns include the characteristically weak liquidity of the charter school, limited construction risks, and standard charter renewal risks.

Upon issuance, bond proceeds will be loaned to American Academy Building Corporation (the corporation), pursuant to the terms of a Mortgage and Loan Agreement (the loan agreement), by and between the issuer and the corporation. Bond proceeds will finance the acquisition, construction and equipping of a school facility, fund a debt service reserve, capitalize interest, and pay costs of issuance. The corporation is a nonprofit organization with no employees and a governing board solely comprised of employees and board members of AACS. The corporation will lease the financed facility upon its completion to AACS, which will house the charter school.

The bonds are secured by loan payments to be made by the corporation, the sole funding source of which are lease payments to be made by AACS. Lease payments are a general obligation of the charter school, subject to annual appropriation. Additional bondholder protections include the use of a debt service intercept mechanism, a first lien mortgage on the completed facility, a fully funded debt service reserve, and various funded reserves, including the maintenance of a minimum ending fund balance in an amount equal to 5% of prior fiscal year's budgeted expenses. Additional debt is not allowed under the indenture.

A key structural component of the bonds is AACS's required participation in the Colorado Charter School Intercept Program, as AACS's primary source of funding is the per pupil revenue (PPR) it receives from the Douglas County School District No. RE 1 (the district). Under the intercept program, the state treasurer will deposit a portion of AACS's monthly PPR payment directly with the trustee for the life of the 2008 bonds. Use of the intercept mechanism supports the full and timely payment of debt service to bondholders.

AACS's current school facility has restricted its ability to grow enrollment to meet demand. It anticipates increasing its fall 2008 FTE enrollment of 507 students to 730 in fall 2009 as a result of its new and expanded space and current wait list of 757 children. The charter school plans to reach its full enrollment goal of 763 students in fall 2010. Fitch believes this goal is attainable due to AACS's location in an area of high growth and the demand for its curriculum. AACS has posted solid operating performance since fiscal 2005, its first year of operation. Its operating margin for fiscal 2007, its first year of full grade-level operation, was 8.97%.

Since inception, the school has built a reputation of committed leadership and an ability to produce positive academic outcomes among the students it serves. Although the school is subject to standard charter renewal risks, it has successfully gone through the renewal process once, and its continuing academic achievement record suggests the risk of charter revocation, and, consequently, an interruption in its receipt of PPR, is minimal. AACS's current charter contract is set to expire June 30, 2013.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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 Ratings
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Douglas J. Kilcommons
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