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Rating Action:

Moody's Assigns Baa3 to Summit Public Schools - Obligated Group, CA Series 2017

14 Sep 2017

New York, September 14, 2017 -- Issue: Charter School Revenue Bonds (Summit Public Schools - Obligated Group) Series 2017; Rating: Baa3; Rating Type: Underlying LT; Sale Amount: $31,670,000; Expected Sale Date: 10/05/2017; Rating Description: Revenue: Other;

Summary Rating Rationale

Moody's Investors Service assigned an initial Baa3 rating and stable outlook to Summit Public Schools - Obligated Group, CA Series 2017, expected to be issued in the approximate amount of $31.67 million. The current issuance represents the first public debt issuance of Summit Public Schools (SPS).The Baa3 rating reflects SPS' favorable market position with 11 schools in the California Bay Area and Washington State serving a current enrollment as of fall 2017 of 3,738 students in grades 6-12. The rating incorporates the charter school network's strong academic record and satisfactory financial performance and metrics, although these reflect historically strong fundraising capabilities. While coverage of operating leases by net revenues has been favorable, this is expected to narrow to closer to 1.3x coverage of debt service obligations. Monthly days cash is satisfactory at 99 days.While Moody's rating is based upon operations of the entire network, it incorporates credit features under an Obligated Group structure, whose lease payments from Obligated Group members to the Community High School Foundation, a California nonprofit corporation, represent the source of repayment under the Loan Agreement. Two schools along with Summit's home office represent members of the Obligated Group for the series 2017 issuance: Summit Shasta, Summit Denali high school, and the Summit Home Office. Bond proceeds will be used to construct a new facility for Summit Shasta, renovate Summit Denali high school, as well as renovate the Home Office. The Home Office revenues are derived from the management fee SPS charges its member schools, which currently equals 16% of annual revenues received, excluding contributions. Serving as a credit strength, payment obligations under separate leases with each member of the Obligated Group are cross-collateralized, and the Trustee is authorized to charge additional rents to any Obligated Group member. While not legally pledged, management fees to any of the schools could be increased if necessary assuming schools are performing well. The Baa3 rating is also based upon covenants for the Obligated Group, which include 45 days' cash on hand, and debt service coverage of at least 1.10x. Additionally, there is a lockbox mechanism under which state aid for the two California schools is sent directly from the State Treasurer to the trustee for payment of debt service. SPS continues to grow its network and has opened up three schools in Washington since the 2015-2016 school year. Additionally, the Summit Learning Program, which was developed through a partnership with Facebook and remains supported by the Chan Zuckerberg Initiative, is expected to roll out to over 330 schools for the 2017-2018 school year, with utilization by over 800 schools expected by 2022. While SPS has a limited operating history for all eleven of its schools, it has experienced rapid growth, which we expect will continue until full enrollment during the 2022 school year. Notably, because revenues and expenditures associated with the learning program are not delineated in the audit, it is not possible fully segregate contributions, which account for over one-third of total revenues, from any operation support of the schools.

Rating Outlook

The stable outlooks reflects finances that are expected to remain satisfactory, continued enrollment growth, stable liquidity metrics, and expectations of continued strong academic performance.

Factors that Could Lead to an Upgrade

Sustained financial performance coupled with increased cash levels

Sustained debt service coverage well in excess of covenant requirements

Pattern of charter renewals

Factors that Could Lead to a Downgrade

Narrow debt service coverage levels at or below a 1.1x rate covenant

Decline in liquidity from current levels that approximate 100 days

Enrollment growth that falls below projections or enrollment declines

Declines in charitable contributions with resulting weakening in financial performance

Legal Security

The Series 2017 bonds are secured under a loan agreement between the California School Finance Authority and the borrower, Community High School Foundation, Inc, which serves as the Obligated Group Representative. Loan repayments are secured by lease payments from the three members of the Obligated Group: Summit Shasta, Summit Denali grades 9-12, and Summit Home Office, and gross revenues of the Obligated Group members are pledged. Payment obligations under separate leases with each member of the Obligated Group are cross-collateralized, and the Trustee is authorized to charge additional rents to any Obligated Group member. Providing additional security is a state intercept from California under which SPS will direct California's State Controller to intercept, on a monthly basis, state aid that would otherwise be paid to the two obligated schools, as well as a portion of the state aid for all other SPS California schools. The State Controller will then pay the Trustee all Rent coming due under the Shasta Lease, Denali Lease, and Home Office Lease and pay ground rent payments under the Shasta Ground Lease and Home Office Ground Lease. Funds received by the Trustee pursuant to the Intercepts will be held in trust and will be disbursed, allocated and applied solely for the uses and purposes set forth in the Bond Indenture, including if necessary, the payment of debt service on the Bonds.The Washington schools are not subject to an intercept mechanism; however, they have entered into a control account under which they grant to the Trustee management fees from the Washington schools. Covenants for the bonds are 1.10x base rent coverage and 45 days' cash on hand. Violation of either of these provisions requires that an independent consultant be hired if requested by the majority of bondholders. In the case of base rent coverage, anything under 1.0x coverage would be considered an Event of Default. The additional bonds test requires 1.2x projected coverage of debt service for three years. Bonds are additionally secured by a mortage on Summit Denali project, and a lease hold interest on the Home Office and Summit Shasta.A debt service reserve fund equal to traditional three-pronged test will be funded from bond proceeds. A repair and replacement fund also will be set up with initially funded at $0 increasing by $4,170 each month until funded at $150,000.

Use of Proceeds

Bond proceeds will be used to construct a new facility for Summit Shasta as well as renovate Summit Denali high school and Summit Home Office. Summit Shasta projected cost is $11.8 million, Summit Denali projected cost is $26.1 million, and the Home Office projected cost is $4.6 million.

Obligor Profile

Summit Public Schools is a charter management organization started in 2003 operating one school and has expanded to operating 11 schools throughout the California Bay Area and Washington State serving grades 6-12. Enrollment for academic year 2017-2018 is 3,738 students.

Methodology

The principal methodology used in this rating was US Charter Schools published in September 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Regulatory Disclosures

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Helen Cregger
Lead Analyst
Regional PFG West
Moody's Investors Service, Inc.
One Front Street
Suite 1900
San Francisco 94111
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Dan Steed
Additional Contact
Regional PFG West
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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