OREANDA-NEWS. Fitch Ratings has affirmed the 'BB+' rating on approximately $65.7 million of Florida Development Finance Corporation revenue bonds, series 2010 A & B 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 six Florida charter schools (the financed schools); a cash-funded debt service reserve fund; a partial debt service guarantee from Charter Schools USA (CSUSA) for one school (Duval Charter Scholars Academy, or DCSA); and mortgage liens (first liens on four of the financed facilities and a leasehold interest in a fifth).

Bondholders benefit from structural aspects of the transaction, including subordination of operating expenses along with CSUSA's cost reimbursement and 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 subordinated cost reimbursement and fees).

KEY RATING DRIVERS

IMPROVING COVERAGE: In fiscal 2015, with the inclusion of a previously-excluded institution following attainment of a charter renewal, the bond schools covered Fitch-calculated transaction maximum annual debt service (TMADS) by about 1.4x.

SPECULATIVE CHARACTERISTICS: The series 2010 pooled transaction continues to have speculative-grade characteristics, largely due to the limited operating histories of some of the financed schools, slim operating margins, weak balance sheet liquidity, and a high debt burden.

OPERATING AND ENROLLMENT STABILITY: Enrollment at five of the six financed schools declined slightly, but were at or close to capacity, in fall 2015. Although one school remained well below original projections and was about 66% capacity. Consolidated operations for the group also benefitted from a 1.9% increase in state per pupil education funding in fiscal 2015.

EXPERIENCED MANAGEMENT: The financed schools benefit from the management oversight and successful track record of CSUSA, which serves as their education management organization (EMO). CSUSA's various EMO contracts are not coterminous with final bond maturity (2041). Fitch notes that the bond schools have virtually no management capability absent a contracted manager.

RATING SENSITIVITIES

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 which, if pressured, could negatively impact the rating.

CREDIT PROFILE

The financed schools are Renaissance Elementary Charter School (charter through 2019); Renaissance Charter School of St. Lucie (RCSL, charter through 2019); Duval Charter Scholars Academy (DCSA, charter through 2018); North Broward Academy of Excellence (charter through 2026); North Broward Academy of Excellence Middle School (charter through 2030); and, the Keys Gate Dorm Facility with students from Keys Gate K-8 Charter School (charter through 2027). All schools are within counties along the east coast of Florida. Both of the North Broward schools are located on the same campus. All of the financed schools have had at least one charter renewal.

Per sector criteria, Fitch attempted to correspond with all authorizers associated with this credit. Fitch communicated with three of the four district authorizers, who indicated that their respective charter schools, at this time, were in good standing. However, Fitch was unsuccessful in its attempts to contact the remaining authorizer, Miami-Dade County School District. But, given the strong student demand and stable financial positions at the Miami-Dade authorized charter schools among Renaissance's financed schools, Fitch is provided with reasonable confirmation to accept the status of each of the schools' authorization as reported by Charter Schools USA (the contracted manager).

STABLE OPERATIONS

More recently, the financed schools' February 2016 enrollment count stood at 4,445 students, representing a 3.5% increase over June 2015 enrollment levels. Management adjusted the financed schools' expenses during fiscal 2015 and consolidated operations were positive. As in fiscal 2013 and 2014, DCSA remains well short of its original enrollment target, and in fall 2015 the facility had a utilization rate of about 66%. The other financed schools, however, are at or close to their capacity/utilization levels.

Consolidated operating margin for the financed schools is typically breakeven or modestly positive. The margin for fiscal 2015 was approximately 2% at $749,000. When adjusted for all of CSUSA's subordinated cost reimbursement and fees of about $3 million, the adjusted margin increased to 10.1%. For fiscal 2015, CSUSA reported a 1.9% increase in per pupil aid and a 3.6% increase for fiscal 2016.

ADEQUATE DEBT SERVICE COVERAGE

Two of the financed schools (RCSL and DCSA) are relatively new. RCSL was established in 2010 with an initial charter through June 2014, which has since been renewed through 2019. DCSA was established in 2011 with an initial charter through June 2015, which has since been renewed through 2018.

Fitch calculates consolidated net income available for debt service equal to about 1.4x of TMADS ($5.06 million). In previous reviews, Fitch excluded DCSA due to its limited operating history and lack of any charter renewal, per Fitch criteria. Fiscal 2015 was the sixth consecutive year when consolidated net available income of all financed schools met or exceeded 1x TMADS.

LIMITED FINANCIAL CUSHION

RCS' consolidated available funds (defined as unrestricted cash and investments) was $7.4 million as of June 30, 2015, equal to a slim 22.5% of consolidated operating expenses and 11.3% of outstanding debt (approximately $65.7 million). These liquidity metrics remain low and consistent with the rating category. Fitch expects continued modest but gradual improvement over time. CSUSA holds liquidity principally at the school level, not with the manager.

CONTRACTS REMAIN STABLE

Charters for the bond schools expire between 2018 and 2030. RCS and CSUSA management report that they have never had a renewal application rejected. CSUSA's management contracts for the financed schools expire beginning in 2018, with automatic five-year renewals thereafter.

ACADEMIC PERFORMANCE

Academic performance is a key factor in both charter and management contract renewals. For the 2014/2015 academic year, three financed schools maintained their academic grades, while three financed schools' grades worsened. Management reports that the latter schools' grades were affected by state academic calculations that excluded learning gains (a factor included in previous years). Management also indicated that the learning gains component will be included in 2015/2016 academic grades, which may result in improved grades.

Two schools maintained their academic grade at 'A'. Four of the financed schools received at least an 'A' or 'B' from the Florida State Department of Education, which the state considers high-performing. DCSA maintained its 'C' academic grade.

Management attributes the relatively lower DCSA academic scores to a challenging student demographic served by the school. CSUSA reports that management has stabilized at the school, and it remains focused on addressing marketing, enrollment and academic issues. Fitch will continue to monitor CSUSA's ability to build enrollment and maintain academic progress at DCSA.