OREANDA-NEWS. Fitch Ratings has affirmed the 'BB-' rating on the Florida Development Finance Corporation's (FDFC) approximately \$88.3 million revenue bonds, series 2011A/B. The bonds are issued on behalf of Renaissance Charter School, Inc. (RCS).

The Rating Outlook is Stable.

SECURITY

The bonds are jointly secured by lease payments made from the unrestricted revenues of seven Florida charter schools (the financed schools); a cash-funded debt service reserve; and first liens on three of the financed facilities and a leasehold interest in the fourth.

Bondholders benefit from structural aspects of the transaction, including the consolidated revenue pledge of the financed schools; subordination of operating expenses along with Charter Schools USA's (CSUSA) management fees; and unrestricted revenues of the financed schools flowing monthly from RCS to the trustee, with initial allocations to debt service. Annual bond covenants include liquidity tests and a 1.1x debt service coverage covenant (adjusted for subordinate management fees) commencing in fiscal 2014.

KEY RATING DRIVERS

LIMITED OPERATING HISTORIES: The financed schools are nearing completion of their enrollment ramp-ups, with all school facilities in fall 2014 at 94% or greater utilization. However, all but two schools have been in operation for four or less years, and those schools are still operating under their initial charters. As such, the schools' financial and debt profiles remain speculative grade under Fitch's charter school rating criteria.

SLIM BUT IMPROVING FINANCIAL PERFORMANCE: The consolidated schools generated a break-even GAAP operating margin in fiscal 2014, compared to negative margins in 2013 and 2012. Also on a consolidated basis, transaction maximum annual debt service (TMADS) coverage in fiscal 2014 was positive 1.3x. However, per Fitch's criteria, the schools generated less than 1x adjusted coverage of TMADS when only schools with at least one charter renewal and a five-year operating history are included.

ENROLLMENT GROWTH ON TRACK: Partially offsetting the financial risks, enrollment in fall 2014 is stabilizing and approaching facility utilization levels at each of the financed school. Fitch views this enrollment growth, as well as the schools' solid academic performance, positively.

EXPERIENCED MANAGEMENT: The financed schools benefit from the management oversight and successful track record of CSUSA, which serves as the education management organization (EMO). CSUSA's various EMO contracts are not coterminous with final maturity of the bonds. Fitch views this as a credit risk, since the financed schools have virtually no management capability absent CSUSA. Fitch anticipates regular renewals given the schools' high reliance on CSUSA and its role in starting up the schools.

RATING SENSITIVITIES

SUCCESSFUL MATURATION OF NEW SCHOOLS: If enrollment grows or stabilizes in each school, operating performance and balance sheet strength could improve sufficiently to support upward rating momentum. However, rating movement is unlikely until the financed schools have all received at least one charter renewal (three of the new schools have charter terms through June 2016, and one through June 2015).

STANDARD SECTOR CONCERNS: A limited financial cushion; substantial reliance on enrollment-driven per pupil funding; and charter renewal risk are credit concerns common in all charter school transactions that, if pressured, could negatively impact the rating.

CREDIT PROFILE
The financed schools are Hollywood Academy of Arts and Sciences (current charter through June 30, 2029), Hollywood Academy of Arts and Sciences Middle School (June 30, 2015), Duval Charter School at Baymeadows (2016), Duval Charter High School at Baymeadows (2016), Renaissance Charter School at Coral Springs (2016), and the Homestead Facility with students from Keys Gate Charter School (2027) and Keys Gate Charter High School (2015). The two Hollywood schools are located on adjacent campuses, as are the two Duval facilities.

Three of the financed schools (Hollywood Academy of Arts and Sciences, Hollywood Academy of Arts and Sciences Middle School, and Keys Gate Charter School) have operated between nine and 12 academic years and have received at least one charter renewal. The remaining schools have only been open since either the 2010-2011 or 2011-2012 academic years, reflecting the limited operating history of the series 2011 transaction.

Per Fitch's criteria, contact is also to be made with the schools' charter authorizers. During this review cycle, two of the three authorizing school districts communicated with Fitch. Based on this and prior contact, Fitch considers the relationship between CSUSA and the authorizing school districts to be positive.

ACADEMIC PERFORMANCE
Fitch views the oversight provided by CSUSA favorably, and the solid academic performance of the financed schools. For the 2013/2014 academic year, five of the financed schools received a letter grade of either 'A' or 'B' from the Florida Department of Education. One school, Keys Gate Charter High School, received a 'C', which is weaker than that received the prior year. Fitch understands that the state considers a 'C' grade to be average. Overall, Fitch considers the academic results as generally strong and a partial offset to the limited track records and lack of renewal history.

Like other schools in Florida and many in the U.S., the series 2011 financed schools are preparing for new state tests, which management reports are largely based on Common Core curriculum. The first new tests will be administered in the spring of 2015, and add some uncertainty state-wide. Given the schools' relative academic strength, Fitch does not expect this to be a concern.

STABILIZING ENROLLMENT
Combined enrollment at the financed schools was 6,447 (as of October 2014), up from 6,160 in 2013. The manager reports that all financed schools were between 94%-99% of their facility utilization, indicating that most grade build-out has been completed, and that enrollment growth will be more modest going forward.

IMPROVED BUT STILL WEAK FINANCIAL PROFILE
All but three of the financed schools have been in operation for four or less years, and four are still operating under their initial charters. As such, per Fitch's criteria, debt service coverage (TMADS, or maximum annual debt service excluding a final bullet maturity) is calculated with only two of the schools. For fiscal 2014 the criteria TMADS calculation was below 1x, and the schools' financial and debt profiles remain speculative grade under Fitch's charter school rating criteria.

On a consolidated basis in fiscal 2014, however, the combined operating margin was a breakeven \$416,000 or 0.9% - the first year it was not negative. This calculation does not adjust for subordinated management fees of about \$4.8 million (up from \$2 million the prior year) - that would have resulted in an adjusted operating margin of over 10%. Fiscal 2014 results were supported in part by enrollment growth and a 6.5% increase in state per-pupil funding. Management projects that the current 2015 operating results will again be balanced on a consolidated basis.

The GAAP-based performance is somewhat stronger than management's original base case projection, which forecasted operating deficits until fiscal 2016. Going forward, modest enrollment growth at the newest schools, coupled with an improved state funding environment should support the schools' operating performance on a combined basis. For fiscal 2015, CSUSA reports a 2.7% per pupil (PP) funding increase. Another increase is expected in fiscal 2016; related budgets are conservative, and at this time assume no PP increase.

WEAK BALANCE SHEET
Characteristic of the charter school sector, balance sheet resources remain weak for the financed schools. Available funds, defined as unrestricted cash and investments as of June 30, 2014 were \$6.5 million, up from \$4.8 million at fiscal-year-end 2013. Available funds ratios in fiscal 2014 improved only modestly, and remained weak at 14.6% of operating expenses (\$44.3 million) and 7.4% of outstanding debt (approximately \$88.3 million), consistent with peer charter schools rated by Fitch. In the near term, Fitch does not anticipate substantial improvement in balance sheet ratios.

HIGH DEBT LEVERAGE
Debt metrics for the series 2011 schools remained weak in 2014, which is typical of relatively new schools in build-out mode. The TMADS debt burden has been moderating as enrollment grows and increases school expense budgets relative to debt service; however, it remained high at 15.3% in fiscal 2014, compared to 21.3% in fiscal 2013. Additionally, coverage of outstanding debt by net income available for operations was 8.7x in fiscal 2014, an improvement from 11.1x in fiscal 2013, but still a speculative-grade characteristic.