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Rating Action:

Moody's assigns Ba2 to Belle Creek Charter School, CO's Series 2022A and 2022B; the outlook is stable

26 Apr 2022

New York, April 26, 2022 -- Moody's Investors Service has assigned Ba2 ratings and a stable outlook to Charter School Refunding Revenue Bonds (Belle Creek Charter School Project) Series 2022A and Federally Taxable Series 2022B. The bonds will be issued in the expected par amounts of $5.8 million and $120,000, respectively. The Colorado Educational and Cultural Facilities Authority will be the conduit issuer. Upon issuance of the Series 2022 A&B bonds, this will be the only outstanding debt for Belle Creek Charter School.

RATINGS RATIONALE

The Ba2 rating reflects this K-8 school's established operating history since its opening in the fall of 2003 with two successful charter renewals with Adams & Weld Counties S.D. 27J (Brighton) (Issuer Rating Aa3/STA), which serves as the school's authorizer. The rating is also based upon our expectation that enrollment growth will resume following two years of consecutive enrollment declines driven by the coronavirus pandemic, which reduced enrollment from a recent high of 689 in fiscal 2020 to 600 in the current fiscal year. Despite the receipt of substantial federal and state relief funding, this decline, along with the school's decision to retain staff, has led to two consecutive years of operating deficits with less than sum sufficient debt service coverage in fiscals 2021 and 2022. However, liquidity is expected to remain adequate following deficit spending in fiscal 2022 at around 140 days' cash. Following the 2022 refunding, which will extend debt service for 15 years, a return to balanced operations with additions to reserves in fiscal 2023 is expected. Legal covenants, which are weak but typical of the sector, are also factored into the rating. Governance is a key driver of the rating action and considers the district's use of an outside contractor for financial management and budgeting, providing additional expertise.

RATING OUTLOOK

The stable outlook reflects our expectation that the school's financial performance will return to balanced operations outside of one-time revenues in fiscal 2023 supported by resumed enrollment growth.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Return to enrollment growth trend

- Restoration of balanced operations with additions to reserves

- Sustained improvement in liquidity

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Continued enrollment losses

- Operating deficits beyond fiscal 2022

- Weakening in academic performance or market position

LEGAL SECURITY

All of the charter school revenue bonds are payable from payments received pursuant to a Loan Agreement between the Colorado Educational and Cultural Facilities Authority (CECFA) and the Belle Creek Education Center (the Corporation), a nonprofit corporation organized for the purpose of serving as borrower and lessor of the charter school land and property. Under the Loan Agreement, the Corporation will make debt service payments from pledged revenues, which consist of all revenues derived from the charter school facility, most notably lease payments made to the Corporation pursuant to the Lease Agreement with Belle River Charter School as Lessee. The school will make lease payments from Charter School Revenues, defined as all income and revenue of the charter school with the exception of restricted donor gifts or special purpose revenues that are not available for debt service.

Under Colorado's intercept mechanism, per pupil revenues will be paid directly to the trustee by the state treasurer. This structure provides additional security and serves to partially offset risks associated with Belle River's lease payments that are subject to annual appropriation.

Legal provisions are weak but typical of the sector, with a debt service coverage requirement of 1.1x and a 40 days cash requirement in addition to a 3% emergency reserve required under Colorado's Taxpayer Bill of Rights (TABOR). Should coverage fall below 1.1x, a consultant must be hired. Less than 1.0x coverage constitutes an event of default if cash is less than 90 days. Should days' cash fall below 40 days, a consultant must be hired if the school is directed to do so by a majority of bondholders. Days' cash of less than 40 days for two consecutive years constitutes an event of default. The bonds are additionally secured by a reserve fund equal to maximum annual debt service (MADS) for the Series 2022 bonds and a Deed of Trust in the school property. The Additional Bonds Test (ABT) requirement under the Indenture, 1.1x coverage for the most recent fiscal year and 1.1x coverage of MADS after project completion as determined by a consultant.

The structure benefits from the state's Charter Intercept Statute, under which the State Treasurer, on a monthly basis, will pay debt service from the school's per pupil revenue allocation. Monthly payments will be based upon 1/6 principal and 1/12 interest amounts, paid directly to the Trustee from first available state aid payments owed to the school. The intercept provides protection against liquidity issues or administrative error at the school level, but it does not protect against a shortfall in per pupil revenue stemming from a decline in enrollment or the termination of the school's charter. In the event of default, the bonds are additionally secured by a deed of trust on the school property, which is owned by the corporation.

USE OF PROCEEDS

Bond proceeds will refund $6.1 million in outstanding debt. The refunding structure will extend debt service repayment by fifteen years, with final maturity in 2052, providing around $200,000 in annual cash flow savings through 2037.

PROFILE

Located in Henderson, Colorado, Belle Creek currently serves 600 students in grades K-8. While the school has an extended operating history since its opening in the fall of 2003, it has experienced two consecutive years of enrollment declines through fiscal 2022, reportedly due to the impact of the coronavirus pandemic, and does not have a waitlist. The school offers a Core Knowledge curriculum with academic performance that generally aligns with that of the district, although scores demonstrate improvement and some out performance at the upper grade levels. The school has successfully renewed its charter twice with its authorizer, Brighton School District No. 27J. Its current charter extends through June 30, 2030.

METHODOLOGY

The principal methodology used in these ratings was US Charter Schools published in September 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1039451. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

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