OREANDA-NEWS. Fitch Ratings has affirmed the underlying 'B' rating on $34 million of outstanding Colorado Educational and Cultural Facilities revenue bonds (series 2004, 2008, and 2010A&B) issued on behalf of The Academy.

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 DEBT SERVICE COVERAGE: The Academy generated just over 1x maximum annual debt service (MADS) coverage in fiscal 2015, contributing to the continued Positive Outlook. These positive results are due to a trend of growing enrollment and improved cash flow. The debt burden remains high at 21%.

OPERATING LOSSES: The Academy recorded a full-accrual operating loss in fiscal 2015 and another loss is expected in 2016. Reported deficits reflect non-cash pension expenses related to recent accounting changes. Favorably, however, The Academy's operations are positive on a cash basis.

CONSISTENT ENROLLMENT GROWTH: The Academy has benefited from consistent enrollment growth, although further growth will be limited as The Academy schools are approaching capacity.

THIN LIQUIDITY: The Academy has modest balance sheet cushion. At fiscal year end (FYE) 2015, available funds-to-operating expenses measured 10.3% and available funds-to-debt measured 5.1%.

RATING SENSITIVITIES

IMPROVEMENT IN CORE OPERATIONS: An upgrade may be warranted if The Academy continues to demonstrate core operating strength and improved cash flow and debt service coverage (translating to maintenance of MADS coverage of at least 1.0x).

CHARTER SCHOOL SECTOR RISKS: 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, would affect the rating negatively.

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.

OPERATING LOSSES

The Academy recorded an operating loss on a full-accrual basis in fiscal 2015 (-12.2%, adjusted to include interest expense) and another loss is expected in fiscal 2016. Fitch notes that these losses are due in part to increases in non-cash pension expenses resulting from GASB accounting changes.

The Academy has a track record of positive cash flow generation, however. In fiscal 2015, adjusted net income available for debt service (adjusted to add back depreciation/amortization, interest, and non-cash pension expenses) measured $3.2 million (22% of total operating revenue). Continued improvement in cash flow from core operations could contribute to a rating upgrade.

CONSISTENT ENROLLMENT GROWTH

The Academy has benefited from consistent enrollment growth. Based on preliminary estimates for the 2016 - 2017 school year, total enrollment will increase 0.4% over the prior year and 67% since 2008 - 2009. The enrollment trends have benefited top-line revenue growth, which increased nearly 60% between fiscal 2011 and fiscal 2015. Further enrollment growth will be limited, however, as The Academy schools are approaching capacity.

ADEQUATE COVERAGE OF ELEVATED DEBT

The Academy's debt service coverage is adequate despite operating losses. In fiscal 2015, MADS coverage measured an adequate 1.05x (based on calculating adjusted net income available for debt service, adding back depreciation/ amortization, interest, and non-cash pension expenses). Maintenance of MADS coverage above 1.0x could contribute to an upgrade. While the MADS burden is high, at 21% of operating revenue in fiscal 2015, the measure has seen continued improvement. The Academy does not have new money debt plans.

The Academy contributes to the Academy Division Trust Fund, a cost-sharing multiple-employer defined benefit pension plan administered by the Public Employees' Retirement Association of Colorado (PERA). Based on GASB 68, The Academy now reports its estimated pension liability on the balance sheet (the reported net pension liability was $21.7 million at FYE 2015). Management reports that when an employee leaves The Academy the portion of the liability associated with the employee does not remain with The Academy.

FAVORABLE ACADEMIC PERFORMANCE

Fitch believes The Academy maintains a favorable relationship with the Colorado Charter School Institute (The Academy's charter school authorizer). The Academy achieved the highest category rating on CSI's rating for academic results. The Academy's charter expires June 30, 2019.

FAVORABLE REGULATORY ENVIRONMENT

The Academy should continue to benefit from a regulatory environment that is favorable to charter schools in Colorado. Additionally, the Denver area is experiencing strong population trends. For example, population growth in both Adams and Jefferson counties (Westminster is domiciled in both counties) is outpacing the national average, with particularly strong trends in Adams (US Census Bureau data). These population trends should provide strong demand for The Academy in the coming years. Additionally, The Academy does not anticipate new charter school competition in the area in the near term.

THIN LIQUIDITY

The Academy has modest balance sheet cushion to offset unexpected operating challenges. At FYE 2015, available funds-to-operating expenses measured 10.3% and available funds-to-debt measured 5.1%. Available funds-to-debt should at least be maintained as The Academy does not have new money debt plans. Fitch notes that The Academy is "TABOR compliant", a state mandate in Colorado to maintain reserves of at least 3% of operating expenses.

The Academy's physical plant is new and the school does not have capital spending plans beyond routine capital.

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