OREANDA-NEWS. Fitch Ratings has affirmed the 'BB-' rating on the Florida Development Finance Corporation's (FDFC) approximately $86.2 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) 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 subordinate cost reimbursement and fees).

KEY RATING DRIVERS

LIMITED CHARTER RENEWALS: The financed schools are nearing completion of their enrollment ramp-ups, with all school facilities in Feb. 2016 at 96% or greater utilization. Although all seven schools have been in operation for five or more years, three schools are still operating under their initial charters.

SLIM BUT IMPROVING FINANCIAL PERFORMANCE: The consolidated schools generated break-even GAAP operating margins in fiscal 2015 and 2014, compared to negative margins in 2013 and 2012. On a consolidated basis, transaction maximum annual debt service (TMADS) coverage in fiscal 2015 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: Enrollment in fall 2015 is stabilizing and approaching facility utilization levels at each of the financed schools. 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 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 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 (2030), Duval Charter School at Baymeadows (2016), Duval Charter High School at Baymeadows (2016), Renaissance Charter School at Coral Springs (2016), the Homestead Facility with students from Keys Gate Charter School (2027) and Keys Gate Charter High School (2020). All schools are within counties along the east coast of Florida. 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 ten and 13 academic years and have received at least one charter renewal. Keys Gate Charter School opened in fall 2010 and attained a five-year renewal last year. The remaining schools have only been open since fall 2011, reflecting the limited operating history of the series 2011 transaction.

Per sector criteria, Fitch attempted to correspond with all authorizers associated with this credit. Fitch communicated with two of the three 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).

ACADEMIC PERFORMANCE

Fitch views the oversight provided by CSUSA favorably, and the overall solid academic performance of the financed schools. For the 2014/2015 academic year, five of the financed schools received a letter grade of either 'A' or 'B' from the Florida Department of Education. Grades for Keys Gate Charter School and Keys Gate Charter High School weakened to 'C' and 'D', respectively. Fitch understands that the state considers a 'B' grade to be average for the district. For the 2014/2015 academic year, four of the financed schools maintained their academic grades, while three financed schools' grades worsened.

Management reports that the latter schools' grades were affected by new state academic calculations that did not include learning gains (a factor included in previous years). Management indicated that the learning gains component will be included in 2015/2016 academic grades, which may improve academic results. Fitch considers academic results as generally strong for the group as a whole.

STABILIZING ENROLLMENT

Combined enrollment (as of Feb. 2016) at the financed schools was 6,597, up from 6,412 in fiscal 2015. The manager reports that all financed schools were between 96% - 100% 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 of the financed schools have operated for at least five years, although three 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 three of the schools. For fiscal 2015 the criteria TMADS calculation was below 1x, and the schools' financial and debt profiles remain speculative.

On a consolidated basis in fiscal 2015, however, the combined operating margin was a breakeven $311,000 or 0.7% - the second straight year of balanced operations. This calculation is conservative as it does not adjust for subordinated cost reimbursement and fees of about $5.7 million (up from $4.9 million the prior year) - that would have resulted in an adjusted operating margin of over 11%. Fiscal 2015 results were supported in part by enrollment growth and a 1.9% increase in state per-pupil funding. Management projects that the current 2016 operating results will again be balanced or slightly positive on a consolidated basis, due in part to a 3.6% increase in per-pupil funding.

WEAK BALANCE SHEET

Balance sheet resources remain weak for the financed schools. Available funds, defined as unrestricted cash and investments as of June 30, 2015, were $7.1 million, up from $6.5 million at fiscal-year-end 2014. Available funds ratios in fiscal 2015 improved only modestly, and remained weak at 15.2% of operating expenses ($46.8 million) and 8.2% of outstanding debt (approximately $86.2 million), consistent with peer charter schools rated by Fitch. In the near term, Fitch does not anticipate substantial improvement in balance sheet ratios. CSUSA holds liquidity principally at the school level, not with the manager.

HIGH DEBT LEVERAGE

Debt metrics for the series 2011 schools remained weak in 2015, which is typical of relatively new schools in build-out mode. The TMADS debt burden has been moderating as enrollment has grown and school expense budgets have increased relative to debt service; however, it remained high at 14.4% in fiscal 2015, compared to 15.3% in fiscal 2014. Additionally, coverage of outstanding debt by net income available for operations remained steady (although a slight year-over-year improvement) at 8.6x in fiscal 2015.