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Rating Action:

Moody's assigns Aa3 enh./Baa3 und. rating to Stargate Charter School, CO's $41.47M Ref Rev Bonds Series 2018 A&B; Outlook stable

14 Jun 2018

New York, June 14, 2018 -- Moody's Investors Service has assigned a Baa3 underlying and Aa3 enhanced rating to Stargate Charter School, Co's $41.08 million Charter School Refunding Revenue Bonds, Series 2018A, and $390 thousand Charter School Refunding Revenue Bonds (Federally Taxable), Series 2018B.

RATINGS RATIONALE

The Baa3 underlying rating reflects Stargate Charter School's strong competitive profile, including unique academic offerings, consistent academic outperformance of state and district averages, and strong management with a proven willingness and ability to increase enrollment as necessary to meet obligations. The rating also incorporates an adequate financial position that is characterized by historically solid liquidity, satisfactory operations with strong prospects for increased local and state funding, narrow debt service coverage, and a high debt burden that is mitigated by the absence of additional debt plans.

The Aa3 enhanced rating is based on the rating of the Colorado Charter School Moral Obligation Program, and the structure and legal protections of the transaction, which provides debt service reserve replenishment or direct payment of debt service by the program, if necessary. For more information on the Moral Obligation Program, please see Moody's Rating Action on the Colorado Charter School Moral Obligation Program dated May 24, 2018.

RATING OUTLOOK

The stable outlook reflects our expectation that Stargate will achieve enrollment targets necessary to meet debt service requirements in the near term. The stable outlook also reflects our expectation of balanced operations and improved liquidity levels going forward, and debt service coverage levels in excess of bond covenant requirements.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Significant decline in leverage

- Sustained, material improvement in debt service coverage

- Improved liquidity

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Material decrease in liquidity

- Coverage that falls near or below covenant levels after fiscal 2018

- Decline in enrollment that leads to reduced revenue and structural imbalance

LEGAL SECURITY

The Series 2018 bonds will be secured by Loan and Security Agreements between the Colorado Educational and Cultural Facilities Authority and the Stargate Foundation, a nonprofit corporation, which will serve as borrower, owner, and lessor of the Lease Agreement. The borrower will then lease the facilities to Stargate Charter School. The bonds are additionally secured by the gross revenues of Stargate Foundation, which consist primarily of the school's rental payments under the Lease agreement, and a mortgage interest in the school site.

The bonds will be covered by the state's Charter Intercept Statute, under which the state treasurer will make debt service payments directly to the trustee from the school's per pupil revenue (PPR) allocation. The intercept provides protection against liquidity issues or administrative error at the school level, but it does not protect against a shortfall in PPR due the decline in enrollment or the termination of the school's charter.

The bonds have qualified for and will participate in the Colorado Charter School Moral Obligation Program. The bonds have a debt service reserve funded at maximum annual debt service. Per the statutes, if there is a draw on the bond debt service reserve that is not immediately replenished, the authority shall submit to the governor a certificate certifying the amount required to restore the bond debt service reserve to the reserve requirement. The governor, in turn, shall submit to legislature a request for an appropriation in an amount to restore the bond debt service reserve fund. In the bond indenture, the authority covenants to make the notice to the governor. The statutes and the indenture do not specify the timing of the actions by the authority and the governor, a weakness compared to other moral obligation pledges.

The bonds also benefit from the Colorado Charter School Debt Service Reserve Fund (CCSDSRF). This is a separate reserve, held by the state treasurer, which is available to pay debt service on participating charter school debt. The balance in the fund currently totals approximately $12.5 million including: $5 million in the interested savings account, funded by an annual 10 basis point payment from participating charter schools, and $7.5 million appropriated by the state legislature. If, 10 days prior to a debt service date, the trustee for a participating charter school bond has not received funds for the payment of principal and interest and the bond debt service reserve has been depleted, the trustee shall notify the state treasurer, who in turn will make the debt service payment using money in the CCSDSRF. Payment of debt service using money in the CCSDSRF does not require additional appropriation by the legislature.

Participation in the Moral Obligation Program and the CCSDSRF is capped by statute at $500 million outstanding principal. Currently, there are 29 participating charter schools with an original issue par amount of $411 million and combined maximum annual debt service of $18.5 million. There has never been a payment made under either program.

USE OF PROCEEDS

Proceeds will be used to refund $41.38 million in outstanding maturities of the Colorado Educational and Cultural Facilities Authority (Stargate Charter School Project) Charter School Improvement Revenue Bonds, Series 2015A. The series 2018 bonds will be the only debt outstanding for the school post-issuance.

PROFILE

Stargate Charter School is a nonprofit charter school, located in Thorton, Colorado, about 12 miles north of Denver, CO (Aaa stable) in Adams County (Aa1). The school serves roughly 1,305 students in grades K-11 in fiscal 2018.

METHODOLOGY

The principal methodology used in the underlying ratings was US Charter Schools published in September 2016. The principal methodology used in the enhanced ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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.

Nikki Carroll
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Nicolanne Serrano
Additional Contact
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Releasing Office:
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