OREANDA-NEWS. Fitch Ratings affirms the 'BB+' rating on $12.3 million of outstanding series 2010A and B bonds issued by the Maryland Health and Higher Educational Facilities Authority (MHHEFA) on behalf of the Patterson Park Public Charter School (PPPCS).

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of PPPCS, secured by a first mortgage on the school's facilities. A cash-funded debt service reserve (DSR) provides further security.

KEY RATING DRIVERS

FINANCIAL METRICS DRIVE RATING: Operating and liquidity metrics for PPPCS are considered speculative grade per Fitch's charter school rating criteria. PPPCS' operating results are typically below or close to break-even on a GAAP basis.

ADEQUATE DEBT SERVICE COVERAGE: PPPCS has demonstrated consistent coverage of transaction maximum annual debt service (TMADS) at or above the covenanted 1.1x. Fiscal 2014 coverage was 1.2x, and fiscal 2015 coverage is expected to be similar. PPPCS benefits from strong demand and stable enrollment, which supports the school's primary revenue-driver, per pupil funding.

LIMITED BALANCE SHEET FLEXIBILITY: PPPCS has stable but weak balance sheet ratios, consistent with the rating category and typical of the sector, that limit flexibility to manage budget fluctuations. An additional factor is union contracts for its teachers.

RATING SENSITIVITIES

MARGIN DETERIORATION: A decline in Patterson Park Public Charter Schools' operating margin that causes Transactional MADS coverage to fall below 1.1x, or causes significant depletion of available funds (defined by Fitch as cash and investments not permanently restricted), would result in a negative rating action.

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

PPPCS opened in 2005 in a former Catholic school located just north of Patterson Park in Baltimore, MD. PPPCS expanded its facilities in fall 2011. Since receiving an initial three-year charter in 2005, PPPCS has received two five-year charter renewals from Baltimore City Public Schools (BCPS). The most recent five-year renewal extends the charter to June, 2018.

Enrollment in this PreK-8 charter school is stable with solid demand. For fall 2015, enrollment was 686 students, up from 673 in fall 2013. About 20% of students are K or Pre-K. The school is located in southeastern Baltimore and has a curriculum that emphasizes diversity and a thematic, experiential learning approach. Management reports that the school is in good standing under its charter and has a positive working relationship with the authorizer, BCPS.

SPECULATIVE GRADE OPERATIONS AND BALANCE SHEET METRICS

The 'BB+' rating reflects weak balance sheet ratios, which are consistent with the rating category. Available funds (AF), defined by Fitch as cash and investments not permanently restricted, reached $1.46 million at June 30, 2014, an increase from $1.1 million in fiscal 2013. Unaudited fiscal 2015 AF is expected to be similar. This resource level represented only 17% of fiscal 2014 operating expenses and 12% of outstanding debt. AF provides only limited budgetary cushion.

Operating margins on a full accrual basis have been break-even or slightly negative in recent years. The fiscal 2014 net operating deficit was $208,000, an operating margin of negative 2.5%. The fiscal 2015 operating results are expected to be very similar. The primary driver of the slim GAAP results is depreciation and interest expense associated with the series 2010 bond-financed facility expansion.

The school reports that the fiscal 2016 budget is balanced and operating results should be comparable to both fiscal 2014 and preliminary fiscal 2015. Management budgets to meet or slightly exceed the 1.1x coverage covenant. As a result, GAAP performance is expected to remain below break-even for the near term. PPPCS has limited control on increases in operating expenses (mainly salaries and benefits), which are mandated by BCPS union contracts.

ADEQUATE DEBT SERVICE COVERAGE

PPPCS' budgets generate adequate coverage of the school's TMADS obligation. TMADS is MADS excluding a planned double payment in the final amortization year ($942,762 for the series 2010 bonds). The fixed rate debt service structure is level. PPPCS generated 1.18x TMADS coverage in fiscal 2014, and expects to have a similar level in fiscal 2015 based on preliminary financial results. The TMADS obligation represented a high 11.5% of fiscal 2014 operating revenues; debt burden for fiscal 2015 is expected to be similar.

Bond covenants include a 1.1x minimum MADS coverage ratio and a requirement for cash and investments to be at least 7% of total operating expenses. Per the school's fiscal 2013 and 2014 disclosure, both of these covenants were met; the same is expected for fiscal 2015. Bond documents also require quarterly funding of a renewal and replacement fund up to $200,000 over time; at June 30, 2014, the R&R fund held $86,000; the balance at June 30, 2015 (unaudited) was similar.

SOLID DEMAND AND STABLE ENROLLMENT

Like most charter schools, PPPCS is heavily reliant on per pupil funding to support its annual operating budget, primarily from per pupil funding through the Baltimore City Public Schools. Student-generated revenues typically provide more than 92% of operating revenues. Given the concentrated revenue stream, maintaining stable enrollment and balance sheet reserves over time are important credit factors.

PPPCS has modestly increased enrollment in recent years, well past the originally anticipated 585 students. Enrollment was 686 in fall 2015, up from 682 in fall 2014 and 673 in fall 2013. Management indicates that about 35 additional K-8 students could be added under the existing charter cap, which allows enrollment of up to 675 K-8 students. This gap provides some demand and budget flexibility, as the school has no facility constraints. School management has no plans to request a higher enrollment cap from its authorizer.

BUDGET CONSTRAINTS

Per pupil funding (PPF) is the school's largest revenue source. Actual PPF for fiscal 2016 is $9,387, down slightly from $9,556 in fiscal 2015 and $9,450 in fiscal 2014. The fiscal 2017 funding level is not yet available. Over time, PPF for PPPCS tends to be flat or increase modestly.

PPPCS' expense flexibility is more limited than many charter schools because its instructional faculty, employed by BCPS, is unionized. PPPCS must fund any negotiated pay/benefit increases, even if the annual PPF amount is not adjusted to accommodate such increases. That is again the situation for fiscal 2016, with salary increases of 4.7% and benefit increases of 7.1%, but a slight decline in the PPF amount.

The current three-year BCPS contract was negotiated effective for fiscal 2014, 2015 and 2016, and included annual teacher bonus, wage increases and step increase. As salaries and benefits typically comprise the majority of operating expenses, Fitch views this as a significant limitation. PPPCS's budgets are consistently tight.

Additionally, Baltimore charter schools, including PPPCS, are required to pay a portion of BCPS debt service, even if a school is not located in BCPS facilities. For PPPCS, who owns its own facility, management reports this is about $200,000 per year. Positively, however, PPPCS does not have teacher pension expense (that is a liability and expense of the city).

PPPCS' relative budgetary stability benefits from solid expense management, as well as strong demand. For fall 2015, PPPCS received 163 applications for 46 pre-kindergarten openings and 163 applications for 96 kindergarten openings. Retention is quite strong, and very few new grade 1-8 students are admitted (only six students in fall 2015).

The school does not carry or draw from wait lists during the academic year. The strong retention and very selective admissions indicate strong family satisfaction with the academic program.