Fitch Affirms HTH Learning's (California) Revs at 'BB+' / 'BB'; Outlook Stable
OREANDA-NEWS. 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:
--$4,365,000 (High Tech High projects) series 2008A (Media Arts) at 'BB+';
--$18,200,000 (High Tech High projects) series 2008B (Chula Vista) at 'BB'.
The Rating Outlook is Stable for both.
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.
SOLID DEMAND: Both HTHMA and HTHCV have demonstrated solid demand, supported by a network 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 continues to decline. Both schools are heavily dependent on state per-pupil funding, and both have very limited balance sheets.
OPERATING PERFORMANCE: Weakened debt service coverage or operating performance for either High Tech High Media Arts or High Tech High Chula Vista, which is not presently expected, could negatively stress the respective rating.
ELIMINATION OF SUBSIDY PAYMENTS: An elimination of the need for a subsidy payment combined with stable-to -improving debt service coverage and balanced operations could lead to an upgrade at High Tech High Chula Vista.
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.
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. HTHL owns the facilities leased to the respective charter schools, and provides supervision, oversight and coordination across its affiliated charter schools.
The organization received a large gift in fiscal 2014, allowing it to purchase a former public school site for a prospective fourth campus housing K-12 students. At this time, management is projecting renovations will cost $13.5 million to $15.5 million and will be funded with a mix of loans, internal reserves and possibly some gifts. A partial opening in fall 2018 and full build-out by 2020-21 is expected.
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 630 grade 9-12 students. The school operates under a five-year charter that extends through June 2017. Fitch was unable to speak with SBE prior to publication. However, given HTHCV's strong student demand and stable financial position, management is not anticipating any issues with its charter renewal.
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 SDUSD charter; the current five-year charter extends through 2019. SDUSD reports a positive working relationship with HTHMA with the school in full compliance with charter standards.
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) with larger increases in 2015 (about 12%) and 2016 (11%-14.5%). Management estimates a 4.5% increase for fiscal 2017. 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 margins in each of the past five fiscal years. The fiscal 2015 results were positive ($114,000 or a margin of 2.9%). This compares favorably to fiscal 2014 results of negative 0.2%. Slimmer results in fiscal 2014 were due to a one-time purchase of computer equipment. Margins for fiscal 2016 are projected to be positive. Coverage in fiscal 2015 of $620,000 annual debt service (equivalent to maximum annual debt service [MADS] and the annual HTHL lease obligation) remains positive; fiscal 2015 coverage was 2.5x.
HTHCV receives a subsidy from other HTHL schools (the various Point Loma facilities) to meet its annual transaction MADS obligation of $1.2 million. With that subsidy, operations are consistently close to break-even, and debt service coverage is positive (1.3x in fiscal 2015). In fiscals 2013 and 2014, the subsidy was lowered to $450,000 from the pledged $600,000 due to stronger operations at HTHCV, and further reduced to $217,139 in fiscal 2015. For fiscal 2016 management is projecting the subsidy at $195,000. Recently HTHCV was awarded a three-year Charter School Facilities Incentive Grant in the amount of $187,500 per year which will allow the subsidy to be further reduced. Management reports the Point Loma Facilities have ample capacity to continue the subsidy at the maximum $600,000 level if required, but there is no expectation that the full amount will be needed in the future. Fitch views the moderating level of subsidization favorably and upgrade potential for HTHCV exists if the subsidy is eliminated, debt service coverage remains stable to improving, and operations are balanced.
SLIM BALANCE SHEETS
The balance sheet cushions at each of the schools remain extremely narrow 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, 2015 declined to $688,000 (from $858,000), equal to a slim 11.8% of expenses (15.5% in fiscal 2014) and 3.7% of debt (4.7% in fiscal 2014). For HTHMA, AF improved to $473,000, still a narrow 12.3% of expenses and 10.7% of debt. HTH management reports that liquidity is managed on a pooled basis at the HTHL and Affiliates level.
At June 30, 2015, AF for HTH Learning and Affiliates was approximately $15 million, up from $12.6 million the prior year. AF in fiscal 2015 was equal to 30.4% of expenses and 20% of pro forma debt ($75 million, including the $22.6 million series 2008A and B bonds). Fitch included a $2 million bank line in the pro forma 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 2015 remained stable and consistent with budget, with 400 students. At HTHCV, enrollment increased to 639 in fall 2015 from 626 in fall 2014 and above the 618 budget. Management is trying to reduce enrollment to a more ideal 560-580, but has not been successful because prior year freshman classes were larger and had strong retention rates. Management expects enrollment will moderate at HTHCV within the next year or two. Both schools are routinely over-subscribed 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 has declined to a more manageable 15.6% of operating revenues from 18% in 2011. Fitch bases this calculation on the $620,000 annual lease payment due to HTHL. Actual series 2008A bond debt service is less. Transaction MADS debt burden remains high at 15.5% in fiscal 2015, but has moderated from 18.4% in fiscal 2010. In fiscal 2015, MADS was 5.8x 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. TMADS represented 21% of fiscal 2015 operating revenues, slightly lower than the prior two years but one which Fitch considers still very high. Similarly, total debt represented a high 11.6x net available income.