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06 Nov 2019
New York, November 06, 2019 -- Moody's Investors Service assigns an underlying Ba2 rating to the Industrial Development Authority of the County of Maricopa's $36.3 million Education Revenue Bonds (Legacy Traditional Schools Projects) Series 2019A (Credit Enhanced) and $100.6 million Series 2019B. The Bonds will be loaned to Legacy Traditional Schools under a Loan Agreement with the Authority. At the same time, Moody's affirms the Ba2 on Legacy Traditional Schools outstanding revenue bonds. The outlook on all ratings is stable.
The underlying Ba2 rating will reflect Legacy Traditional Schools' (LTS) brand strength in the Arizona and Nevada markets, positive demographic growth trends and significant scale compared to peers. The Ba2 will also reflect LTS's stated intent for more moderate growth following the upcoming construction of two new campuses as well as no plans for incremental debt given its already high financial leverage. The Ba2 will also reflect the planned movement of all LTS schools into the obligated group and the presence of a lock-box (Arizona) and intercept mechanism (Nevada) that further provides bondholder security.
These attributes will be offset by LTS's thin liquidity relative to daily operations and debt and narrowing maximum annual debt service coverage and history of missing budgets and projections, the latter of which will take on greater importance as financial leverage increases. Likewise, interschool borrowing within the overall network increased during the past year, contrary to our expectation that the loans would be paid off, signaling cash flow weakness. LTS has grown rapidly given its start-up nature.
Finally, governance risk will remain high given that two of the five board members serving on the LTS Board of Directors in Arizona are family members of Vertex's founder. LTS has two governing boards, one for its Arizona schools and a second for its Nevada schools. Each board has adopted conflict of interest policies and reportedly have ultimate strategic control over its member schools, including contract renewals with the service provider. Notably, it is an event of default under the indenture if any member school loses its individual charter. Charter renewal risks are low.
The stable outlook reflects our expectation that Legacy's sufficient enrollment will translate into higher annual debt service coverage and liquidity will show modest growth.
FACTORS THAT COULD LEAD TO AN UPGRADE
- Significant and sustained growth in liquidity
- Stronger and sustained MADS coverage
- Durable improvement in the Nevada schools' academic performance
FACTORS THAT COULD LEAD TO A DOWNGRADE
- Additional leverage without material growth in financial performance
- Failure to meet enrollment expectations that would not provide sufficient debt service coverage
- Declines in liquidity or continued inter-school borrowing that limits financial flexibility across the obligated group
- Rapid expansion plans into new markets without incremental cash flow
The 2019A&B Bonds, along with the outstanding revenue bonds, will be secured by the combined pledged revenues of the obligated group, all 20 schools of the LTS system. Pledged revenues are almost entirely state aid revenues. The 2019A&B Bonds will be parity obligation of the current outstanding revenue debt. Additionally, all bonds are secured with a first priority lien on and security interest in all of the facilities of the obligated group.
The 2019A Bonds will be guaranteed by the Arizona Public School Credit Enhancement Program, unrated by Moody's. Under this program, in the event the Trustee has insufficient funds to pay debt service on the 2019A bonds, the principal and interest will be paid from the Arizona Public School Credit Enhancement Fund. The schools that are a part of this program are LTS-Phoenix, LTS-West Surprise, and LTS-Goodyear.
Debt service will be segregated on a monthly basis through a lock box mechanism, for the Arizona schools, under which state aid payments are sent directly to the trustee on a monthly basis are directed to debt service and required reserve deposits before release to each of the schools. Scheduled debt service will first be taken from each school based upon the individual project amounts financed, but if these amounts are insufficient, the trustee will take debt service on a pro rata basis from each of the other obligated group members to make payment. The LTS-Nevada schools will enter into a Nevada Control Agreement with the Trustee and Nevada Depository Bank, in which the depository bank will transfer state payments to the Trustee for deposit into the pledged revenue funds. In both Arizona and Nevada, state equalization payments are made monthly in roughly equal amounts.
Covenants are weak for the sector, with sum sufficient coverage of debt service required if days' cash equals a minimum of 90 days. Debt service coverage must be maintained at 1.1x should cash fall below 90 days. Should debt service fall below sum sufficient coverage, the majority of bondholders can declare an event of default. The obligated group has also covenanted to maintain a minimum of 45 days cash on hand. Should cash fall below this level, the obligated group can be required to hire a management consultant if directed to do so by the majority of bondholders.
The issuance of additional bonds, exclusive of refundings and financings necessary to complete a project, requires both sum sufficient (1.0x) coverage of MADS based upon the most recently completed audited year and 1.25x coverage of MADS based upon projections for each successive year. Additionally, if a member school loses its charter, it would constitute an event of default.
USE OF PROCEEDS
Proceeds of the bonds will finance the following: the construction of West Surprise, expected to open in the fall 2020, purchasing and renovating the Goodyear school, refinancing an existing short term construction loan and an expansion at the Phoenix school, and refinance short term construction loans for the Cadence, East Mesa, and Southwest Las Vegas locations.
Legacy Traditional Schools is a K-8 charter school network across Arizona with 15 schools, and Nevada with 3 schools. Current fall 2019 enrollment across all schools is 21,600 students which translated into $151 million in total revenues. LTS opened one additional school in Arizona and Nevada this current academic year.
The principal methodology used in these ratings was US Charter Schools published in September 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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