Tuesday, March 13, 2012 6:13 PM
Fitch Ratings has downgraded the rating on the $18.9 million of Development Authority of Alpharetta, Georgia educational facilities revenue bonds (Fulton Science Academy project) (the bonds) to ‘B’ from ‘BB-’. The bonds remain on Rating Watch Negative.
Joint and several general obligation of Fulton Science Academy, Inc. (Fulton Science Academy Middle School, or the middle school or FSAMS), Fulton Educational Services, Inc. (Fulton Science Academy High School, or the high school), and Fulton Sunshine Academy (Fulton Science Academy Elementary School, or the elementary school; collectively with the middle school and high school, the borrowers, or the schools or FSA), payable from all legally available revenues and secured by a first mortgage lien on the new campus.
KEY RATING DRIVERS
MATERIAL DEFAULT RISK: The downgrade to ‘B’ reflects elevated default risk related to the non-renewal of FSAMS’ charter by its local school district, a shrinking window to pursue alternative charter renewal options, and further FSAMS leadership missteps in managing key relationships.
POTENTIAL LOSS OF CHARTER: Late last year, the charter authorizer (Fulton County School District, FCSD) rejected the middle school’s charter renewal application. FSAMS applied to the state of Georgia’s Department of Education (DOE) for a new charter, but a final determination is not expected until the middle of June, just weeks before its FCSD charter expires.
TURBULENT RELATIONSHIPS CAUSE CONCERN: FSA’s recent failure to obtain required construction approvals for its project, along with the FSAMS charter non-renewal, highlight an on-going, worrying trend of management inattention to regulatory requirements.
CONCERNS TRUMP INVESTMENT-GRADE CHARACTERISTICS: Fitch notes that on a consolidated basis, the borrowers generated solid debt service coverage in fiscal 2011 and standardized test scores generally exceed state and district averages. However, these factors, which help drive positive enrollment trends, do not fully offset the concerns Fitch has regarding FSAMS’ future, and FSA’s relationship management.
WHAT COULD TRIGGER A RATING ACTION
FAILED STATE CHARTER APPLICATION: Expiration of the middle school’s FCSD charter at June 30, 2012, without a replacement state charter could result in an immediate event of default as defined in bond documents. In such a scenario, Fitch would likely downgrade the bonds to no higher than ‘C’, with a Negative Rating Watch. According to terms of the loan agreement and indenture for the bonds, the trustee could implement accelerated redemption provisions.
STATE CHARTER WITHOUT ADDITIONAL FINANCIAL SUPPORT: If the middle school wins approval of a state charter, it still faces the challenge of operating without significant revenues currently provided by FCSD. Should proposed legislative remedies fall short of fully replacing the loss of district funding, the middle school plans to rely upon internal resources, potentially diminishing an already modest financial cushion.
FURTHER ASSESSMENT OF REGULATORY RELATIONSHIPS: The elementary and high schools maintain FCSD charters in good standing.
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