NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'B' rating on $15.9 million of Industrial
Development Authority of the County of Pima, Arizona education revenue
refunding bonds (Carden Traditional Schools project) series 2012.
The Rating Outlook is revised to Stable from Negative.
SECURITY
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The bonds are an absolute and unconditional obligation of the borrower
(Calibre) and the guarantor, E-Institute Charter School, Inc. (EICS),
payable from all legally available revenues, and secured by a first lien
on facilities owned by the borrower. There is additionally a debt
service reserve cash-funded to maximum annual debt service (MADS). Gross
revenues of both the borrower and guarantor will flow directly from the
state treasurer to the trustee for debt service.
KEY RATING DRIVERS
OUTLOOK REVISION: The Outlook revision to Stable reflects Calibre's
slightly improved financial position, removal of a going concern status
in fiscal 2015 as a result of improved financial performance due to the
entity's reorganization. Charter renewals effective July 2015 drive
Fitch's revision of the Outlook to Stable. However, Calibre did not meet
the state's academic performance framework in the 2013/2014 academic
year, which will become a concern if sufficient progress is not
demonstrated.
SPECULATIVE-GRADE CHARACTERISTICS: The 'B' rating reflects Calibre's
improved but still tenuous financial position that includes high debt
burden, expense growth historically outpacing revenues, lower than
anticipated enrollment levels and historical coverage of debt service
only with substantial, albeit planned, EICS support.
ENROLLMENT SHORTFALL: Calibre's enrollment modestly increased in fall
2015 but fell below the enrollment budget, driving management to make
appropriate expense adjustments. Enrollment was generally stable for
EICS in fall 2015. Calibre's ability to adjust expenditures for a lower
headcount may be necessary to alleviate ongoing operating pressure and
possibly stabilize performance.
MANAGEMENT RESPONSIVENESS IMPROVES: Calibre's last two CFOs left the
institution, with the most recent CFO replaced by an outside consulting
firm with charter school experience in spring of 2014. Fitch believes
Calibre's responsiveness level has improved.
RATING SENSITIVITIES
FAILURE OF COVERAGE TEST: The inability to meet the transaction maximum
annual debt service (TMADS) coverage test of 1x for the combined entity
(Calibre Academy and E-Institute Charter School) may constitute an event
of default. Fitch may downgrade the bonds in this case to reflect the
increased volatility due to remedies that include an accelerated
timeline for bond redemption. For fiscal 2015, combined TMADS coverage
was solid at 1.8x.
OPERATING PERFORMANCE: Calibre Academy's ability to sustain operating
improvement, leading to better debt service coverage and less reliance
on E-Institute Charter School's performance, could lead to rating
improvement. E-Institute Charter School's operations are essential to
the current rating, given Calibre Academy's weak margins.
STANDARD CHARTER RENEWAL RISK: Like all Fitch-rated charter schools,
Calibre Academy and E-Institute Charter School are subject to charter
renewal risk, which Fitch views as a substantial credit concern. Despite
renewal effective in 2015 for both schools, Calibre Academy's academic
performance fails to meet standards, which could put the school in
jeopardy of charter revocation if progress is not demonstrated.
CREDIT PROFILE
Calibre serves grades K-8 and includes one school in Surprise, AZ.
Calibre's second physical campus in Glendale and its virtual campus were
both voluntarily closed in 2014. EICS, the financial guarantor for the
rated debt of Calibre, maintains six physical campuses and a virtual
campus. The financial statements and charter agreements for both schools
are managed by the schools' education management organization (EMO),
Learning Matters Educational Group, Inc. (LMEG).
Both Calibre and EICS were initially authorized by Arizona State Board
for Charter Schools (ASBCS, the authorizer) with 15-year terms that
expired in 2015 and both were recently renewed for additional 20-year
terms. LMEG serves as EMO for both schools and maintains a productive
working relationship with the ASBCS.
ENROLLMENT BELOW PROJECTIONS; INCREMENTAL GROWTH
When excluding the now-closed Glendale campus, Calibre's total average
daily membership (ADM), which includes the Surprise campus only,
increased to 710 in fall 2015 from 657. This was below the enrollment
budget of 749, but management reported making appropriate expense
adjustments. ADM for EICS was generally flat at 872 from 881 for fall
2014. EICS does not have a waitlist due to its open enrollment policy.
Calibre Surprise has a waitlist of about 30 according to LMEG, which is
significantly lower than prior years. Opening of a new nearby charter
school increased competition for Calibre Surprise.
Calibre and EICS were noted as generally meeting academic requirements
by the ASBCS at the point of charter renewal. However, post-renewal
there was a drop in Calibre's academic results for the 2013/2014
academic year. However, the school is not labeled a failing school by
ASBC; and therefore, the authorizer indicated that the charter is not in
jeopardy of revocation. Calibre was required to submit a Performance
Management Plan by Nov. 14, 2014, indicating expectations set forth in
the Board's Academic Performance Framework. Data related to continuing
progress is not yet being evaluated by the board as the new 2014/2015
testing framework is in transition.
The state department of education reclassified all of EICS campuses as
alternative, thereby altering the benchmarks used to evaluate
performance and more accurately reflecting its at-risk population. As a
result, the most recent 2013/2014 academic results met the board's
academic requirement.
MARGINS IMPROVE; GOING CONCERN DISCONTINUED
Audited consolidated fiscal 2015 margins are strongly positive and
improved to 19% from 16.5% in fiscal 2014. Calibre's individual
performance also improved to negative 2.6% from negative 4.6% in fiscal
2014, after a deeply negative 24.8% in fiscal 2013. EICS's margin also
improved to 15.1% from 13.3% in fiscal 2014.
Fitch views positive consolidated margins as supporting the rating. For
just Calibre, its ability to improve margins could improve debt service
coverage over time and lessen substantially financial dependence on
EICS. LMEG implemented several measures to align Calibre's expenses with
revenues in fiscal 2015. EICS continues to support Calibre in the form
of expenses paid in its behalf or by working capital advances.
Nonetheless, Calibre still failed to meet the ASBCS financial
performance framework standard in fiscal 2015 with respect to
unrestricted days liquidity, growth in net income and cash flow
measures. However, the auditor's going concern note was discontinued, in
part based on Calibre's positive cash flows in fiscal 2015. Calibre
switched auditor's in fiscal 2015 after its prior auditor merged with
another firm.
Several structural changes were implemented by Calibre for fiscal 2015
to improve operations, including closing Calibre's Glendale campus,
renting out vacant space, and realigning student/teacher ratios at the
Surprise campus. These modifications improved net income for fiscal
2015. Fitch will monitor Calibre's progress in meeting the financial
performance framework in fiscal 2016.
LIQUIDITY AND DEBT SERVICE COVERAGE IMPROVE
Available funds for Calibre and EICS, on a consolidated basis, covered
just 20.6% and 12.5% of operating expenses and debt, respectively. While
improved from fiscal 2014, these levels remain very light, which is
typical of most charter schools rated by Fitch.
Combined TMADS coverage (EICS and Calibre) continues to improve from a
weak 0.9x in fiscal 2013 to 1.8x in fiscal 2015. Adjusting for
management fees which are subordinate to DS payment, coverage improved
to a solid 3.1x in fiscal 2015, up from 1.8x in 2013. Because Calibre,
on its own, provides weak or insufficient coverage of TMADS, EICS
operations, as the guarantor of the bonds, will continue to drive the
bond rating.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Charter School Rating Criteria (pub. 05 Nov 2015)
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy
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