OREANDA-NEWS. Fitch Ratings has affirmed its 'BBB' rating on approximately \\$7.2 million of outstanding Colorado Educational and Cultural Facilities Authority charter school revenue bonds, series 2009 issued on behalf of Crown Pointe Academy (CPA).

The Rating Outlook is Stable.


The series 2009 bonds are payable from annual lease payments made by CPA to the Crown Pointe Academy Building Corp., subject to annual appropriation by the school, and secured by a first mortgage over the financed facility. A cash-funded debt service reserve provides additional bondholder protection.


STATE MORAL OBLIGATION: The 'BBB' rating is based on CPA's inclusion in the state of Colorado's charter school moral obligation program (the program), which provides a mechanism for the state to restore draws on the school's debt service reserve fund.

STABLE CREDIT CHARACTERISTICS: CPA's credit profile is characterized by a successful 17-year operating history, with multiple charter renewals and enrollment growth; generally breakeven to positive operations; and a limited but adequate level of balance sheet resources.

HIGH DEBT BURDEN: CPA's leverage position is evidenced by high debt-to-net income available for debt service and transaction maximum annual debt service (TMADS) that is typically above 15% of annual operating revenues. Partially offsetting the school's high debt burden is its ability to cover TMADS by at least 1x from current operations over the past few fiscal years (1x in fiscal 2014).

STRONG STRUCTURAL AND LEGAL PROVISIONS: Structural and legal provisions providing strong bondholder protection include the state's debt service intercept program and various reserve funds, reflecting a favorable statutory environment for charter schools.


ENROLLMENT STABILITY: Based on its relatively small size, the rating is sensitive to CPA's ability to maintain stable enrollment, which has generated adequate annual debt service coverage from operations. The school is currently operating at capacity with a sizeable waiting list.

STANDARD SECTOR CONCERNS: Limited balance sheet resources; substantial reliance on enrollment-driven per pupil funding; and charter renewal risk are credit concerns common among all charter schools which, if pressured, could negatively impact the rating.



Under the program, if a charter school draws on its debt service reserve fund and fails to replenish it immediately, the authority shall submit a certificate to the governor certifying the amount necessary to restore the reserve fund to its requirement. The governor shall then submit a request for appropriations to the legislature in an amount sufficient to restore the reserve fund. The general assembly then, at its discretion, may appropriate to restore the reserve fund.

In order to qualify for the program, a school must merit an investment grade credit profile at the time of bond issuance, and participate in the Colorado Charter School Intercept Program (CSIP). Under the intercept program, the state treasurer pays a portion of the school's monthly per pupil revenue distribution directly to the trustee in amounts sufficient to pay debt service requirements.

The rating builds upon Fitch's view of the underlying credit quality of the charter school (bottom-up analytic approach). Moral obligation program bonds are secured separately by each school. Fitch views each bond as project-specific. The state is actively engaged in debt issuances under the moral obligation program. The statute provides clear mechanisms to trigger the state's moral obligation. In addition to the moral obligation, the statute also provides an additional backstop (the state charter school debt service reserve fund) so that an additional appropriation due to a debt service reserve drawdown is less likely to be necessary.


Student demand for CPA, which opened in 1997, remains stable. The school is currently operating at capacity with 466 students enrolled in grades K-8, up slightly from 463 last year. CPA added classes to each grade in phases over the past several years, concluding with a second eighth-grade class added for the 2013-2014 school year. The school also maintains an actively managed waiting list that currently has about 700 students, including non-school- aged children. When counting only school-aged children, the waiting list still totals a robust 400 children.

Typical of charter schools, CPA's primary funding source is per pupil revenue (PPR) received from the district, which represented a high 93.1% of the school's fiscal 2014 operating revenue of \\$3.3 million. CPA's dependency on enrollment-related PPR and its relatively small size result in limited revenue flexibility and emphasize the need to carefully manage enrollment, which the school has demonstrated as it grew to full capacity over the past few years. Fitch notes favorably that the state's fiscal position continues to improve. PPR was increased for a second year in fiscal 2015 to about \\$7,300. This followed a 2.5% increase in fiscal 2014, a 0% increase in fiscal 2013 and cuts during the previous few years. Another increase is anticipated for fiscal 2016, although it is too early to know what funding level will be approved.

Enrollment growth enabled CPA to produce generally breakeven to positive operating margins over the past few years. Its margin averaged a sound 2.1% over the past five fiscal years (2010-2014). As expected at the time of Fitch's review last year, the school's operating margin improved to roughly breakeven (positive 0.6%) in fiscal 2014 from negative 2.1% in fiscal 2013. The operating deficit in fiscal 2013 was primarily the result of a planned one-time expense for technology upgrades, as well as a decline in interest earnings. Fiscal 2014 improvement was the result of improved state funding and enrollment growth during the 2013-2014 school year. Further state funding increases, coupled with stable enrollment, should be positive for the school's fiscal 2015 financial results.

CPA's successful operating history continues to be reflected in its students' scores on state assessment tests, which compare favorably to district and state averages. While CPA is subject to the sector standard charter renewal risk, this is partially mitigated by its track record of renewals, having received three five-year renewals from Adams County District No. 50 (the district). The school applied to the district for its next renewal which is coming up in June of this year. The district indicated it is likely to approve the renewal application based on CPA's continued strong academic performance. However, CPA has also submitted an application to the Colorado Charter School Institute, a statewide charter authorizer, as it contemplates switching authorizers. Fitch will follow the status of CPA's charter renewal, which is expected to be finalized in the next few months, but at this time is not concerned based on the school's track record of academic achievement.


CPA's balance sheet resources continue to provide a modest financial cushion to manage unexpected increases in operating expenditures and/or decline in enrollment-related per pupil funding. Available funds (or unrestricted cash and investments) totaled \\$1.3 million as of June 30, 2014, similar to the prior year's level. Available funds covered fiscal 2014 operating expenses (\\$3.3 million) and outstanding debt (\\$7.2 million) by 41% and 18.6%, respectively.

Fitch considers these liquidity metrics as adequate for the rating category and respectable for a sector typically characterized by extremely limited balance sheet resources. CPA's adequate financial cushion partially mitigates concern over its high debt burden and modest debt service coverage. Based on its track record of generally breakeven to positive operating results, favorable demand characteristics, and lack of additional debt plans, Fitch anticipates CPA's balance sheet resources to remain stable.


Pro forma MADS of about \\$1 million represented a very high 31% of fiscal 2014 operating revenues. CPA's debt service schedule follows the fairly typical charter school structure, which incorporates a large final year payment, with the intent of using the balance of the debt service reserve to offset this payment. Therefore, Fitch also looks at TMADS, which excludes the final-year payment, as a better indicator of typical debt service costs over the life of the bonds. This translates to about \\$505,000, resulting in a much lower but still high 15.4% burden. Total debt outstanding-to-net income available for debt service was also high at 13.9x in fiscal 2014, though slightly improved from prior years.

CPA has been able to adequately cover TMADS from operations for the past five fiscal years, which Fitch views favorably. Coverage ranged from 0.9x to 1.3x during fiscals 2010-2014. Coverage was 1x in fiscal 2014 based on net income available for debt service of \\$517,000. Fitch considers TMADS coverage of just 1x and a debt burden of 15%-20% as high speculative-grade credit attributes. Based on the improved state funding environment and CPA's lack of additional debt plans or material capital needs, Fitch believes the school's debt burden should continue to moderate over time.