CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for the series 2008A (Media Arts) and 2008B (Chula Vista) educational facility revenue bonds (together, the 'pledged schools') issued by the California Municipal Finance Authority on behalf of HTH Learning (HTHL) at 'BB+' and 'BB', respectively:
--$4,440,000 (High Tech High projects) series 2008A (Media Arts);
--$18,520,000 (High Tech High projects) series 2008B (Chula Vista).
The Rating Outlook is Stable for both.
SECURITY
Lease payments received by HTHL from High Tech High Media Arts (HTHMA) secure the series 2008A bonds. Lease payments received by HTHL from High Tech High Chula Vista (HTHCV) secure the series 2008B bonds. HTHCV's series 2008B bonds also have a subordinate pledge of up to $600,000 annually from revenues generated by certain other HTHL schools, as well as a mortgage lien on the Chula Vista facility. Both bond series have a cash-funded debt service reserve.
KEY RATING DRIVERS
SPECULATIVE-GRADE CHARACTERISTICS: The 'BB+' and 'BB' ratings, respectively, reflect HTHMA and HTHCV's speculative-grade financial attributes, including high debt burdens, low balance sheet ratios consistent with the rating categories, and positive but modest debt service coverage.
SEPARATELY SECURED BONDS: The series 2008A and the 2008B bonds are separately secured, warranting the distinct ratings. Fitch views HTHCV's credit profile (high debt burden and a debt service subsidy) as weaker than HTHMA's, supporting the one-notch rating distinction.
At Fitch's 2014 rating review, the security pledge for the 2008AB bonds was expected to change upon refinancing of HTHL's outstanding 2005 bonds on or before December, 2014. However, the organization restated and extended the 2005 bonds, but did not technically refinance them. As such, the security pledge for the 2008AB bond remains unchanged.
SOLID DEMAND: Both HTHMA and HTHCV have demonstrated solid demand, supported by a net-work of HTHL elementary and middle school campuses that feed into the two high schools.
LIMITED FINANCIAL FLEXIBILITY: Despite solid academic performance and favorable enrollment trends, both HTHMA and HTHCV operate in improving but still constrained financial environments. HTHCV relies on a debt service subsidy, although that subsidy began moderating in fiscal 2013. Both schools are heavily dependent on state per-pupil funding, and both have very limited balance sheets.
RATING SENSITIVITIES
STANDARD CHARTER RENEWAL RISK: 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 that, if pressured, could negatively impact the ratings.
OPERATING PERFORMANCE: Weakened debt service coverage or operating performance for either HTHMA or HTHCV, which is not presently expected, could negatively stress the respective rating.
CREDIT PROFILE
HTHL is the non-profit parent of several affiliates, including HTH, which operates 12 charter schools. The various schools operate on three campuses, with each campus housing a complement of elementary, middle and high schools to provide academic services. The organization received a large gift in fiscal 2014, allowing it to purchase a former public school site for a prospective 4th campus housing K-12 students. At this time management does not expect enrollment on that campus for 3-4 years. Each HTH charter school uses a project-based learning model, whereby classroom projects weave science, math, literature, history, art and other academic subjects together. HTHL owns the facilities leased to the respective charter schools, and provides supervision, oversight and coordination across its affiliated charter schools.
All affiliate charter schools operate in San Diego County, CA, and management expects that geographic focus to continue. All of HTHL's charter schools are authorized by either the San Diego Unified School District (SDUSD) or under a statewide benefit charter from the State Board of Education (SBE).
HTHCV is one of the SBE-authorized schools and opened in fall 2007. It serves over 620 grade 9-12 students. The school operates under a five-year charter which extends through June, 2017. SBE reports a positive working relationship with HTHCV.
HTHMA serves about 400 grade 9-12 students at the HTH Village in San Diego, and is one of several HTH schools located on a campus on a former Navy base in Pt. Loma. It was founded in fall 2005, and operates under a charter from San Diego Unified School District (SDUSD); the current five-year charter extends through 2019. The district reports a positive working relationship with HTHMA.
PLEDGED SCHOOLS FINANCIALLY STABLE
The pledged schools maintained breakeven to positive operating margins over the past few years, even in years with state per-pupil aid reductions. Per-pupil aid is the dominant funding source for the schools, as is typical in California and with charter schools in general. Modest state per-pupil funding increases began in fiscal 2013, and continued in 2014 (about 3%-5% depending on the school) and 2015 (about 12%), and management estimates an 8% increase for fiscal 2016. Fitch views the improved per-pupil funding environment, combined with solid demand and stable enrollment, as supporting positive operating performance.
HTHMA generated a break-even or modestly positive margin in each of the past five fiscal years. The fiscal 2014 results were at breakeven (negative $9,000, or a margin of negative 0.2%). Management reported this slimmer result (margins have been closer to 2%-4% in recent years) was due to a one-time purchase of computer equipment; margins for fiscal 2015 are projected to be positive and closer to recent norms. Coverage in fiscal 2014 of $620,000 annual debt service (equivalent to MADS and the annual HTHL lease obligation) remains positive; fiscal 2014 coverage was 2.1x. TMADS debt burden remains high at 17.0% in fiscal 2014.
HTHCV receives a subsidy from other HTHL schools (the various Point Loma facilities) to meet its annual Transactional Maximum Annual Debt Service (TMADS) obligation of $1.2 million. With that subsidy operations are consistently close to break-even, and debt service coverage is modestly positive (1.1x in fiscal 2014). In fiscals 2013 and 2014, the subsidy was lowered to $450,000 from the pledged $600,000 due to stronger operations at HTHCV; management projects that the subsidy may be $400,000 in fiscal 2016. The Point Loma facilities have ample capacity to continue the subsidy. Fitch views the moderating level of subsidization favorably.
SLIM BALANCE SHEETS
The balance sheet cushions at each of the schools remain extremely light relative to the rating category. Liquidity remains a significant credit concern, as is the case for many other Fitch-rated charter schools. For HTHCV, available funds (AF; unrestricted cash and investments) on June 30, 2014 was an improved but still slim $858,000, equal to 15.5% of expenses and 4.7% of debt. For HTHMA, AF improved to $372,000, still a slim 10.2% of expenses and 8.5% of debt. HTH management reports that liquidity is managed on a pooled basis at the HTHL and Affiliates level.
At June 30, 2014, AF for HTH Learning and Affiliates was approximately $12.5 million, up from $8.7 million the prior year. This value in fiscal 2014 excludes a $22 million capital gift, and a $7.0 gift recorded as net assets released from restrictions. AF in fiscal 2014 was equal to 28% of expenses and 13.9% of proforma debt ($90.4 million, including the $22.9 million series 2008A and B bonds). Fitch included an $8.0 million bank line in the proforma debt calculation. While HTHL and Affiliate's balance sheet is stronger than that of the pledged schools, not all is pledged or available for series 2008A or 2008B debt service.
STRONG STUDENT DEMAND
Strong student demand at the pledged schools supports operating performance. At HTHMA, enrollment for fall 2014 remained stable, with 400 students. The school is intentionally working to reduce enrollment closer to pre-recession/fiscal 2008 levels; it had increased enrollment slightly when state per-pupil funding was cut. At HTHCV, enrollment increased to 626 in fall 2014, even though the school was also trying to reduce it. Management reports that enrollment at HTHMA is consistent with budget, and enrollment at HTHCV is over budget. Both schools are routinely over-scribed with 2-3 times the applications for every available seat. As such, they use lotteries to select students.
MIXED DEBT BURDEN RATIOS
HTHMA's debt burden is consistently high but manageable at about 17% of operating revenues. Fitch bases this calculation on the $620,000 annual lease payment due to HTHL. Actual series 2008A bond debt service is less. In fiscal 2014, MADS was 7x net income available for debt service, a level more favorable than most Fitch-rated charter schools.
HTHCV's ratios are substantially weaker, reflecting the younger age of the school, higher debt leverage, and reliance on a pledged debt service subsidy from other HTH charter schools at the Point Loma campus. Transaction MADS represented 22% of fiscal 2014 operating revenues, consistent with the prior two years, which Fitch considers very high. Similarly, total debt represented a high 12.7x net available income.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Charter School Rating Criteria' (Sept. 19, 2012);
--'Fitch Affirms HTH Learning's (California) Revs at 'BB+' and 'BB'(Feb. 26, 2014).
Applicable Criteria and Related Research:
Charter School Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688957
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980340
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