OREANDA-NEWS. Fitch Ratings has affirmed its 'BB-' rating on the following revenue bonds issued by the Industrial Development Authority of the County of Pima on behalf of the New Plan Learning, Inc. (NPL) Project:

--$32,575,000 educational facilities revenue bonds, series 2011A;
--$330,000 educational facilities revenue bonds, taxable series 2011B.

The Rating Outlook is Negative.

SECURITY

The bonds are secured by the gross revenues of NPL and primarily comprise lease payments from four participant charter schools located in Illinois and Ohio. The source of repayment is a several, not joint, obligation of the four bond schools. Lease payments are sized to exceed each schools' allocated portion of debt service and to meet 120% of maximum annual debt service (MADS). A mortgage is provided on each participant's school facility.

KEY RATING DRIVERS

EXTERNAL RISKS DRIVE OUTLOOK: The Negative Outlook primarily reflects uncertainty regarding a federal investigation into Concept Schools, the schools' charter management organization. Additionally, funding for the largest charter school participant comes from the Chicago Public Schools (CPS; revenue bonds rated 'B+'/Outlook Negative) and indirectly from the state of Illinois, both of which are under financial stress.

STABLE BUT WEAK FINANCIAL PROFILES: The 'BB-' rating for NPL's series 2011 bonds reflects the mostly speculative-grade credit profiles of the participant schools, including uneven operating performance, very weak balance sheet cushions, and high debt burdens, despite satisfactory debt service coverage.

STRUCTURE PROVIDES COVERAGE CUSHION: The transaction's required reserves and participant annual lease payments, which are allocated in excess of debt service, as well as access to other available funds of NPL, provide incremental credit strength to augment what Fitch considers the weakest credit profile within the pool of four participants. Each school's standalone credit metrics reflect varying but generally speculative-grade credit characteristics.

MIXED ENROLLMENT TRENDS: Enrollment trends vary at the four participant schools, with 2015-2016 enrollment stable at two schools but down at two schools. Also, academic results for the three Ohio schools weakened for the 2014/2015 academic year, which Fitch understands was typical of all Ohio schools in the first year of Common Core alignment.

RATING SENSITIVITIES

ENROLLMENT STABILITY: Due to New Plan Learning, Inc.'s reliance on student-driven per pupil funding to support operations and meet debt service obligations, the rating is highly sensitive to each of the four pledged school's ability to maintain relatively stable enrollment.

OUTCOME OF INVESTIGATION: If resolution of the ongoing federal investigation into the broader Concept network results in impairment of the schools' financial performance and/or demand, it could result in negative rating action.

UNCERTAINTY In ILLINOIS: A reduction or material delay in the funding for the largest charter school participant - Chicago Math and Science Academy - from either the state of Illinois or Chicago Public Schools (the authorizer) could negatively impact the rating for the entire transaction.

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 which, if pressured, could negatively impact the rating.

CREDIT PROFILE
NPL was formed in 2005 by Concept to provide facilities for charter schools administered and managed by Concept. NPL is a separate organization, with its own governing board. Concept continues to manage the four schools; its management practices have historically driven strong academic outcomes and fiscal oversight at these and its other charter schools. The four bond schools together currently enroll about 2,027 students in grades K-12.

The participant schools include Chicago Math and Science Academy (CMSA), located in Chicago, IL; Horizon Science Academy (HSA) Dayton, located in Dayton, OH; and HSA Springfield and HSA Toledo, both located in Toledo, OH. NPL leases charter school facilities to the participants for which it receives lease rental payments (from each school on a several basis). Each payment is structured so that the combined NPL payments cover debt service by 1.2x.

Fitch inquired about each school's charter status with its respective authorizer and gained comfort that each of the schools is generally viewed favorably by their respective authorizers and is in compliance with the terms of their charters. HSA Dayton's charter was renewed in June 2015, and HSA Springfield's charter was recently renewed, prior to its June 2016 expiration.

HSA Springfield only received a two-year renewal, which Fitch views negatively; most renewals have been for five years. The authorizer reported that the shorter two-year charter term has more to do with a new Ohio charter law that requires more authorizer oversight than on HSA Springfield's operating or academic fundamentals. The current charter expiration dates for the four participants are as follows: CMSA and HSA Toledo are June 2019; HSA Springfield is June 2018; HSA Dayton is June 2020.

EXTERNAL INVESTIGATION
In early 2014, HSA Dayton became the subject of investigations by the Ohio state auditor and the Ohio Department of Education regarding multiple allegations by former teachers accusing the school of misconduct. Both those investigations have publicly concluded, with no evidence negative to Concept Schools.

Concept is still subject to a federal investigation into alleged misuse of federal grant funds related to technology. Concept advised that it is cooperating fully with this investigation and responding to all federal subpoenas or information requests. Concept management advised that the timing of any outcome is currently uncertain, but that as more information becomes available, they believe there is no merit to the investigation. Fitch will continue to monitor the situation.

While the Ohio investigations have concluded, Fitch believes the uncertain impact of the ongoing federal investigation warrants a continuation of the Negative Outlook.

STABLE BUT STILL LIMITED FINANCIAL PROFILE
The financial performance of each individual participating school determines the credit strength of the transaction to meet its lease payments, and, therefore, its debt service obligations. Overall debt service coverage was achieved again for fiscal 2015, and was 1.5x on a consolidated basis as calculated per the bond covenants. All four schools covered their respective lease payments to NPL at or above 1x from fiscal 2015 net available income. Modest improvement was largely due to stable enrollment and improved per-pupil funding.

Performance was balanced on a cash-basis, and three of the four schools generated positive GAAP-based operating margins in fiscal 2015. Margins were: (0.7%) for HSA Springfield, 1.5% for HSA Toledo, 3.3% for CMSA, and 1.3% for HSA Dayton. The three Ohio schools typically benefit from donations of a portion of their management fee; without that donation, operations would have been weaker.

CMSA's authorizer, CPS, has been under significant financial stress. CMSA reports that it has received its per pupil funding on time to date in fiscal 2016. For more information on CPS, see "Fitch Downgrades Chicago Board of Ed (IL) ULTG)s to 'B+'; Outlook Negative, dated January 19, 2016.

The schools' balance sheet resources remain extremely weak and limit the rating. Available funds (AF, defined by Fitch as cash and investments not restricted) at the four schools ranged from a high of $1.16 million at CMSA as of June 30, 2015, to a low of $8,000 at HSA Dayton. The AF levels in the three Ohio schools provided virtually no coverage of operating expenses and outstanding debt, which Fitch considers a speculative-grade credit characteristic.

AF ratios for CMSA were only slightly stronger at 16% of 2015 expenses and 9% of its proportion of debt. Of the $32.7 million of outstanding series 2011 bonds, the share allotted to each school is approximately: 38.7% to CMSA, 22.2% to HSA Dayton, 20.7% to HSA Toledo, and 18.4% to HSA Springfield.

HIGH DEBT BURDENS
Further limiting the rating are the schools' high debt burdens, which is typical of the charter school sector. Pro forma MADS on the series 2011 bonds is approximately $3.2 million, with a mostly level amortization schedule through final maturity in 2041. The schools' MADS burdens are all high, measured as maximum lease payment as a percent of operating revenue, ranged from a low of 10.7% for HSA Toledo to a high of 20% for HSA Dayton (the latter is mitigated in part as the high school shares a facility with an elementary school).

The series 2011 projects renovated and/or expanded the schools' facilities. At this time management reports no further debt plans, which Fitch views as prudent given the lack of additional debt capacity.

ADDITIONAL BOND PROVISIONS
Bond provisions for NPL are strong with multiple reserves providing an excess cushion and a required NPL debt service coverage ratio of 1.2x. Bondholders also have a security interest in NPL's gross revenue fund in which the indenture requires NPL maintain no less than 12% of aggregate corporate revenues (the definition for which includes rents from non-financed schools).

Other reserves held by the trustee and available to cover debt service include a bond revenue fund ($500,000) and a cash-funded debt service reserve funded at MADS. A capital and maintenance operating fund is currently being replenished to its original size of $1 million (the balance was $872,000 in January 2016), after being used to expand the original HSA Toledo project.

All of the reserve balances are tested quarterly. Diminishing balances at the bond revenue fund, coupled with insufficient balances at the NPL gross revenue fund, could result in a negative rating action. Replenishment of the various reserves is subject to excess funds received from participant lease payments and would only occur after satisfying debt service.