OREANDA-NEWS. Fitch Ratings has downgraded the rating to 'BB-' from 'BB' on approximately \$8.68 million of outstanding public school academy limited obligation revenue bonds, series 2011, issued by the Michigan Finance Authority on behalf of Hope Academy.

The Rating Outlook is also revised to Negative from Stable.

SECURITY

Pledged revenues consist of up to 20% of state allocated per pupil foundation allowance (PPFA), and all other legally available, unrestricted funds. The trustee intercepts the pledged revenues from the state of Michigan monthly for bond debt service, prior to remitting excess funds to Hope. In addition to the intercept, bondholders benefit from a property mortgage and a cash-funded debt service reserve equal to maximum annual debt service (MADS). There is an annual debt service coverage (DSC) covenant of at least 1.1x.

KEY RATING DRIVERS

MULTIPLE FACTORS DRIVE RATING ACTIONS: Hope's weak balance sheet resources, high debt burden, enrollment decline in fall 2014, low academic performance, and pending charter renewal all drive the rating downgrade and Negative Outlook. Hope's financial and renewal risks have both increased, and are now more characteristic of the 'BB-' rating category.

WEAK BALANCE SHEET: Hope's balance sheet remains weak, which provides limited flexibility to manage operating or enrollment fluctuations. Fiscal 2014 available funds ratios were only 1.2% of operating expenses and 0.9% of debt.

LOW ACADEMIC PERFORMANCE: Hope has demonstrated low academic performance in the last four academic years. In 2013 and 2014 it was designated by the state as a 'Priority School' with very weak academic results relative to all Michigan schools. Hope is currently in the first of a three-year remediation plan. There is significant weight placed on academic performance in the charter renewal process, which is a key credit concern.

ENROLLMENT AND POPULATION DECLINES: Enrollment dipped 13% in fall 2014 (fiscal 2015), following several years of growth. This decline is partly due to lower Detroit area population. Stressed enrollment, in combination with pressure to enhance academic performance, strains operating results and increases credit risk.

DSC ACHIEVED: Hope has met or slightly exceeded covenanted DSC of 1.1x in six out of the last seven fiscal years, including 1.3x in fiscal 2014. Management projects meeting coverage in fiscal 2015. This is a credit strength that precludes a larger downgrade at this time.

RATING SENSITIVITIES

ACADEMIC PERFORMANCE: Failure to improve academic performance, and make significant annual progress under the mandatory three-year academic transformation plan could heighten renewal risk and cause rating pressure.

ENROLLMENT AND FINANCIAL PERFORMANCE: Failure to stabilize or build enrollment in fall 2015, contributing to weaker operating performance, DSC and bond covenant compliance, would likely result in additional downgrades.

STANDARD SECTOR CONCERNS: 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 rating.

CREDIT PROFILE

Hope Academy is a K-8 charter school located near the historic district of Detroit, MI (the city), and serves students living in the city and surrounding suburbs. Hope has operated since 1998, having received three five-year charters, with the most recent renewal a three-year charter through June 2016. Fitch understands the shorter charter term is due in part to poor academic performance. Most students are from low-income families and qualify for free or reduced lunch assistance. About 10% receive special education services.

A separate alternative high school temporarily shared both Hope's facility and its charter authorization for only the 2012/2013 academic year. That arrangement ended, and only Hope now occupies the facility.

ENROLLMENT PRESSURES

Proceeds from the series 2011 bonds were used to purchase a former Detroit Public School building with capacity of about 700 students. This allowed Hope to add seventh and eighth grades. Enrollment for fall 2014 fell 13% to 615, down from 705 in fall 2013. This decline followed six years of enrollment growth.

Management reports that the lower fall 2014 enrollment was due to population decline in the Detroit metro area, where there are more public/charter school seats available relative to students, creating a competitive environment. In addition, as Hope does not provide transportation, if parents move it may be difficult to continue at the school. Hope's leadership indicates that applications for fall 2015 are currently ahead of the same time last year.

Further, the school typically sees attrition within the academic year, which results in lower student revenue. In the 2014-2015 academic year, fall enrollment dipped about 3% from 615 to 595 by January; in the 2013-2014 academic year, fall enrollment dipped 7% from 705 to 656 for the same period.

MANAGEMENT CHANGES

Hope made significant management change in the 2013-2014 year, which have resulted in lower expenses in fiscal 2015. These include changing to a management company structure with Black Family Development, Inc. (BFDI) as manager and employer of all staff, hiring a new school leader, cutting expenses, and laying off some non-teaching staff in order to focus on academics. Effective fiscal 2015, Hope/BDFI employees are no longer part of the state retirement system. Hope's board composition remains stable with five members.

Fitch notes positively that the school currently remains in good standing under its charter and management has a positive working relationship with the authorizer, Eastern Michigan University (EMU).

SLIM BUT BALANCED OPERATING PERFORMANCE

Hope's operating margin has fluctuated widely in recent years, and on a full accrual basis has been modestly negative in four out of the last seven years. Fiscal 2014 results were close to break-even at negative 0.2%. Fiscal 2013 results include financial operations of the alternative high school which is no longer part of Hope, and are not comparable to prior years.

For the current fiscal 2015 budget year, management reports that its budget is balanced and six-month interims are on track with budget expectations. Hope expects to achieve the 1.1x annual DSC and have a small surplus. Failure to meet coverage covenants would likely trigger a downgrade by Fitch. For the current fiscal 2015 budget, the school continues to monitor and adjust its expenses. Fitch views Hope's weak balance sheet reserves as limiting the school's ability to absorb enrollment or state funding fluctuations.

SUFFICIENT DSC

Positively, Hope has achieved at least 1.0x current coverage in all but one of the last six years. Fiscal 2014 MADS coverage (which is virtually the same as annual coverage due to level debt service) was 1.3x, which compares to fiscal 2013 coverage of 1.5x. Fiscal 2013 results, which include operation of the alternative high school, are not comparable to other years. Management projects it will modestly exceed coverage requirements in fiscal 2015. Fitch does not view Hope as having any new debt capacity at this time.

WEAK BALANCE SHEET

Hope has had a weak balance sheet historically. Available funds (AF), defined as cash and investments not permanently restricted, was \$81,000 at June 30, 2014, well below the already slim \$145,000 at June 30, 2013. Fiscal 2014 AF represented only 1.2% of annual operating expenses (\$6.7 million) and 0.9% of outstanding debt (\$8.6 million). Fitch considers this liquidity level very weak for the 'BB' rating category.

The school has a 2015 state aid note for \$950,000 (the same amount as in 2014) to smooth cash-flow during the academic year. The note is secured by state per-pupil funding. Hope reports that state payments are consistently made on time.

ACADEMIC PERFORMANCE

In each of the last four academic years, Hope has failed to achieve state academic targets. In both 2013 and 2014, continuing into 2015, the school is classified as a 'Priority School', an under-performing institution. As such, Hope's academic achievement is among the lowest 5% of all schools (public and charter) in Michigan. The 2014-2015 academic year is the first of Hope's state-mandated, three-year academic transformation plan to improve academic performance. Like other schools in Michigan and many in the U.S., Hope is also preparing for new state tests, which adds further uncertainty. Michigan is adopting a hybrid of its previous achievement test with some Common Core components, to be administered in the spring of 2015.

CHARTER RENEWAL

EMU, Hope's authorizer, noted that academic performance is weighted heavily (as much as 60%) in renewal considerations. EMU renewed Hope's charter in 2013, but for a three-year period instead of the standard (and former) five-year period. This change was due in part to Hope's academic performance. Fitch continues to view Hope's charter renewal risk as heightened.