NEW YORK--(BUSINESS WIRE)--Fitch Ratings downgrades to 'BB+' from 'BBB-' and removes from Rating Watch Negative the rating on $9.395 million in education revenue bonds issued by the Beasley Higher Education Finance Corporation. The bonds are issued on behalf of FOCUS Learning Academy, Incorporated (FOCUS).
The Rating Outlook is Stable.
SECURITY
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
MARGINAL FINANCIAL METRICS: The expected continuation of the break-even to positive margin demonstrated in fiscal 2012, limited balance sheet flexibility and moderately high debt to net available income are considered speculative grade attributes under Fitch's revised charter school rating criteria. Thus providing the basis for the downgrade to 'BB+' despite the financial profile's ability to support the current debt level.
ENROLLMENT SHORTFALLS: Total enrollment fell short of projected levels in two consecutive years. This resulted in a much slimmer margin in fiscal 2012 and required significant expense reductions beginning in the second quarter of fiscal 2013 to maintain budgetary balance.
GOVERNANCE LACKS INDEPENDENCE: While demonstrating effective management, overlap between FOCUS' board of directors and day to day administration team compromise the independent oversight mechanism that Fitch's revised criteria expects to be present in an investment grade charter school.
RATING SENSITIVITES
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.
DEBT ISSUANCE: The decision to move forward with additional debt issuance before enrollment growth targets have been met and before financial improvement has been consistently demonstrated could trigger further negative rating action.
CREDIT PROFILE
Fitch is concerned about management's inability to accurately project enrollment patterns and the resultant negative impact on financial operations. FOCUS' actual enrollment of 888 students fell well below the projected number of 975. This despite continuing to grow enrollment by a strong 25.2% in fall 2011. Management made the decision to absorb the $750,000 associated revenue shortfall (approximately 7.4% of budgeted revenues) rather than make expenditure reductions. For fiscal 2012, this resulted in a reduced, but still positive, operating surplus of 1.6% or $154,000 and a reduction of overall financial flexibility.
FOCUS' decision not to cut costs increased the importance of meeting enrollment projections in fall 2012. FOCUS is solely reliant on per pupil funding sources for its operating revenues. In fall 2012, not only did FOCUS fail to achieve its projected enrollment level of 1,075 students, it fell short of the fall 2011 goal of 975 for a second consecutive year, enrolling just 922 students. Having added personnel in anticipation of significant enrollment growth that did not materialize, FOCUS was forced to implement somewhat drastic expense cuts to balance the budget.
Fitch expects margins to remain near the break-even level until enrollment levels grow to the originally projected levels. Thus underscoring the speculative grade nature of the operating profile. Management is committed to allowing actual enrollment drive future staff and expense increases, which Fitch views positively.
Resource growth slowed in fiscal 2012 as compared to Fitch's expectations as a result of the minimal operating surplus. Available funds grew just 5.5% to $1.36 million or 14.8% of fiscal 2012 operating expenses ($9.2 million) and 13.7% of total outstanding debt ($9.9 million). Fitch views this level of financial cushion as providing only modest additional flexibility. In combination with the narrowed operating flexibility following the expense cuts that were made in the second quarter of fiscal 2013, Fitch views the weakened overall financial profile as the primary driver of the downgrade to 'BB+'.
FOCUS' current financial profile continues to provide adequate support for outstanding debt obligations. Net income available for debt service provided a healthy 1.4x coverage of transaction maximum annual debt service ($817,000) in fiscal 2012. Annual debt service obligations are approximately level through final maturity in 2041. Future expansion, which will also be driven by the achievement of certain enrollment thresholds, could put further pressure on FOCUS' balance sheet resources. Issuance of additional debt to fund this expansion in the absence of a commensurate growth in resources levels to support its repayment would be viewed negatively.
Located in Dallas, TX FOCUS is a charter school that received its first charter in 1998 and started with an initial enrollment of 177 students in grades K-6. FOCUS prides itself on its multi-sensory approach to education, which results in the development of specialized curricula for 'learning different' students. This cohort currently makes up approximately 20% of the student body.
Fitch's actions are part of its completed industry-wide review, which commenced September of last year when Fitch placed all of its rated charter schools on Rating Watch Negative. Fitch will release an overview of its rating actions in a separate press release later today.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research
--'Charter School Rating Criteria' (Sept. 19, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Fitch Places all Charter School Bonds on Rating Watch Negative (Sept. 19, 2012).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Charter School Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688957
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