OREANDA-NEWS. Fitch Ratings has affirmed the 'BB+' rating on approximately \$66.5 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 School at Arlington); 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 management 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 management fees).

KEY RATING DRIVERS

LIMITED HISTORY; IMPROVING COVERAGE: In fiscal 2014, excluding the newest school, the remaining bond schools covered Fitch-calculated transaction maximum annual debt service (TMADS) by about 1.1x. Similar coverage was not achieved in either fiscal 2013 or 2012. Fitch charter school criteria excludes from its debt service coverage calculations schools with less than five years of audited financials and no charter renewal history. The series 2010 pooled transaction continues to have speculative-grade characteristics, largely due to the limited operating histories of some of the pledged schools, slim operating margins, weak balance sheet liquidity, and a high debt burden.

OPERATING AND ENROLLMENT STABILITY: All but one of the financed schools grew enrollment modestly or were close to capacity in fall 2014. One school (representing 12% of the pool's fall 2014 enrollment) remained well below original projections and was about 60% capacity. Consolidated operations for the group also benefitted from a 6.5% increase in state per pupil education funding in fiscal 2014. Management reports a 2.7% increase in fiscal 2015, and another increase expected in fiscal 2016.

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 CSUSA. Fitch anticipates regular charter renewals given the schools' high reliance on CSUSA and its role in starting up the schools.

RATING SENSITIVITIES

SUCCESSFUL MATURATION OF NEW SCHOOLS: If enrollment growth and maturation continues, operating margins improve, and all the financed schools receive timely charter renewals (two schools are currently up for renewal in 2015), upward rating momentum is possible over time.

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 (charter through 2019); Duval Charter School at Arlington (DCSA, 2015); North Broward Academy of Excellence (2026); North Broward Academy of Excellence Middle School (2015); and the Keys Gate Dorm Facility with students from Keys Gate K-8 Charter School (charter through 2027). Both of the North Broward charter schools are located on the same campus. All but one financed school has had at least one charter renewal; DCSA's initial charter runs through June 30, 2015. Fitch communicated with three of the four local district authorizers; they indicated that their respective charter schools, at this time, were in good standing.

STABLE OPERATIONS

The financed schools' fiscal 2015 initial budget assumed consolidated enrollment of 4,566, and breakeven operations for each entity. The February 2015 enrollment count stood at 4,357 students, mainly due to enrollment declines at DCSA. Management has adjusted the financed schools' expenses accordingly and consolidated operations are projected to be balanced in fiscal 2015. As in fiscal 2013 and 2014, DCSA remains well short of its original enrollment target, and in fall 2014 the facility had a utilization rate of about 60% . The other schools, however, are at or close to their capacity/utilization levels, with enrollment build-out progressing closer to plan.

Consolidated operating margin for the financed schools is typically breakeven or modestly positive. The margin for fiscal 2014 was essentially breakeven at \$233,000. When adjusted for 100% of CSUSA's subordinated management fee of about \$3 million, the adjusted margin increased to 9%. For fiscal 2015, CSUSA reports a 2.7% increase in per pupil aid, following a 6.5% increase in fiscal 2014 (well above the initially projected 2%). The schools' budgets forecast breakeven operations in fiscal 2015, and Fitch views this forecast as achievable.

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. When DCSA is excluded from Fitch's assessment of TMADS coverage, Fitch calculates consolidated net income available for debt service equal to about 1.1x of TMADS (\$5.05 million).

For fiscal 2014, including all bond schools, net available income covered TMADS by 1.3x, and generated a slightly positive 0.7% operating margin. This compares to 1.3x coverage in fiscal 2013, a year that also recorded a breakeven GAAP margin of 0.2%. Fiscal 2014 was the fifth 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 \$6.5 million as of June 30, 2014, equal to a slim 19.3% of consolidated operating expenses and 9.7% of outstanding debt (approximately \$66.5 million). This compares to available funds of \$6.2 million as of June 30, 2013, with similar liquidity ratios. Fitch recognizes the nominal growth in available funds; however, 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/operator.

CONTRACTS REMAIN STABLE

Charters for the bond schools expire between 2015 and 2027. RCS and CSUSA management report that they have never had a renewal application rejected. Fitch expects regular charter renewals through final maturity of the series 2010 bonds. CSUSA's management contracts for the financed schools expire beginning in 2015, with automatic five-year renewals thereafter.

ACADEMIC PERFORMANCE

Academic performance is a key factor in both charter and management contract renewals. For the 2013/2014 academic year, all financed schools improved their academic grade or remained at 'A'. Five of the financed schools received at least an 'A' or 'B' from the Florida State Department of Education, which the state considers high-performing. One school (DCSA) received a 'C', but that improved from 'D' the prior year.

Management partly attributed the relatively lower DCSA academic scores to a challenging student demographic served by the school, a more transient community with a military base, as well as management turn-over. CSUSA reports that management has stabilized at the school, and it continues to address marketing, enrollment and academic issues. Fitch will monitor CSUSA's ability to build enrollment and maintain academic progress at DCSA, but expects no significant challenges at this time based on CSUSA's experience.

Like other schools in Florida and many in the U.S., the financed schools are preparing for new state tests, which management reports are largely Common Core. The first new tests will be administered in the spring of 2015, and add some uncertainty state-wide. Given the financed schools' relative academic strength, Fitch does not expect this to be a concern.