OREANDA-NEWS. Fitch Ratings has upgraded the underlying rating on the following Colorado Educational and Cultural Facilities Authority revenue bonds issued on behalf of The Academy to 'B' from 'B-':

--\\$17.7 million charter school revenue bonds (Academy of Charter Schools Project), series 2004;
--\\$6.1 million charter school revenue bonds (Academy of Charter Schools Project), series 2008;
--\\$9.7 million charter school revenue bonds (The Academy Project), series 2010A&B.

The Rating Outlook remains Positive.

SECURITY

The bonds are ultimately payable from lease payments made by The Academy to two building corporations, subject to annual appropriation. The building corporations have mortgage interests in the school facilities financed by the separately secured series 2004 and 2008 bonds and series 2010A and 2010B bonds. Cash-funded debt service reserves for all four series of bonds provide additional bondholder protection.

KEY RATING DRIVERS

IMPROVED OPERATIONS DRIVE UPGRADE: The Academy is a well- established Colorado charter school with an over 20-year operating history. Three consecutive years of positive GAAP-based operating margins through fiscal 2015 (unaudited) demonstrate a more stable financial position consistent with the higher rating level.

WEAK BALANCE SHEET: Thin liquidity levels and a considerable debt burden highlight The Academy's weak balance sheet. In addition, available funds provide limited cushion for narrow debt service coverage of slightly more than 1x.

SOUND DEMAND AND ENROLLMENT TRENDS: A sound demand profile includes positive enrollment trends to near full capacity, healthy retention rates, and a favorable academic performance relative to district- and state-wide averages.

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.

RATING SENSITIVITIES

CONTINUED FINANCIAL IMPROVEMENT: Sustained improvement in The Academy's financial results, coupled with material gains in liquidity levels, could support upward rating movement over the medium term.

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 that, if pressured, could negatively affect the rating.

CREDIT PROFILE

Located in Westminster, Colorado, The Academy has been in operation since 1994. The school operates under a single charter for all grade levels through high school.

NEW AUTHORIZER

The Academy's charter with the Charter School Institute (CSI) matches the previous charter term and represents the maximum allowable in the state. The charter is in effect for five years from July 1, 2014-June 30, 2019. CSI is an independent agency of the Colorado Department of Education with approximately 31 schools under its purview.

The Academy's management had noted at the time of the authorizer change that CSI's continuous monitoring, support, and resources could help guide the school in improving its financial position. The recent three-year trend of positive operations provides some evidence of a turnaround. Moreover, management appears to have resolved Tabor amendment and working capital reserve violations, as well as internal control deficiencies. The Academy obtained a bondholder waiver through fiscal 2016 for a 2013 working capital covenant breach; management is required to demonstrate progress on an annual cycle toward reestablishing covenant compliance.

IMPROVING OPERATING MARGINS

Positive financial operations drive the rating upgrade. Unaudited fiscal 2015 results suggest a third consecutive year of gains: the general fund posted a \\$627,000 increase on approximately 5% revenue growth to \\$14.8 million. Fiscal years 2013 and 2014 operating margins each registered 1.6% compared with the prior three-year average of negative 5.6%. State funding and enrollment growth, as well as ongoing expense management, contributed to the positive changes.

Greater than 1x annual debt service coverage in each of fiscal years 2013 and 2014, too, is a positive indication. However, coverage remains narrow at about 1.1x and available funds provide very limited financial cushion to absorb weak cash flows. Coverage of maximum annual debt service (MADS; 2035) remains less than 1x.

Typical of charter schools, The Academy's primary funding source is per pupil revenue (PPR) received from the district, which represented a high 80.4% of the school's fiscal 2014 operating revenue (\\$14.2 million). The state increased fiscal 2015 PPR for a second year 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.

WEAK BALANCE SHEET

In contrast with its improving financial operations, The Academy's weak liquidity metrics and high debt burden present considerable rating concerns. Unrestricted cash and investments cover operating expenses and long-term debt by just 10% and 4.1%, respectively, despite the school's improved operating margins. Both ratios are little changed in recent years. Moreover, The Academy's MADS burden is a very high 21.7%.

POSITIVE ENROLLMENT TRENDS

The Academy's sound demand profile supported by strong academic performance remains a fundamental credit strength. Enrollment growth has averaged 2.3% annually over the past three years to approximately 1,873 in fiscal 2016. Management expects continued increases over the next one-to-two years before enrollment reaches the school's maximum capacity of around 1,900 students. Such growth is supported by healthy school-wide retention rates averaging 92.3% with little deviation over the past five fiscal years.

Student demand and retention rates benefit from the school's favorable academic performance. Results of the state's annual Transitional Colorado Assessment Program exam exceeded district and statewide averages through fiscal 2014. More recent results after a change in testing standards begun in fiscal 2015 are not yet available.

PARTICIPATION IN STATE PROGRAMS

The Academy is part of the Colorado Charter School Intercept Program. Under the program, the state treasurer pays a portion of the school's monthly PPR distribution directly to the trustee in amounts sufficient to pay debt service on all bonds. The Academy's series 2004, 2008, and 2010A bonds (not the series 2010B bonds) are also part of the state of Colorado's charter school moral obligation program, which provides a mechanism for the state to restore draws on the school's debt service reserve fund.

The Academy's participation in various state programs provides additional bondholder protection. However, Fitch's underlying rating does not reflect the school's participation in such programs.