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Rating Action:

Moody's assigns an initial Ba2 rating to Academy for Academic Excellence, CA's Series 2020A and 2020B Charter School Revenue Bonds; outlook is stable

05 Dec 2019

New York, December 05, 2019 -- Moody's Investors Service has assigned an initial Ba2 rating and a stable outlook to the California Enterprise Development Authority's Charter School Revenue Bonds (Academy for Academic Excellence Project) Tax-Exempt Series 2020A and Taxable Series 2020B. The bonds are expected to be issued in the approximate amounts of $9.5 million and $915,000, respectively. Under a Lease Agreement, the High Desert "Partnership in Academic Excellence" Foundation, as Lessee, has pledged revenues from the Academy for Academic Excellence (AAE) toward lease payments, which are expected to be the repayment source for the Series 2020 bonds. Following issuance, the 2020A & B bonds will represent the only outstanding long-term debt secured by revenues of the Academy for Academic Excellence (AAE).

RATINGS RATIONALE

The Ba2 rating reflects the favorable market position of this Transitional Kindergarten (TK) - 12 school, which has operated at essentially full enrollment since fiscal 2016. The school outperforms its chartering district, and testing result are generally in line with state averages. The rating also incorporates improved, but still weak financial performance with a very narrow cash position at the end of fiscal 2019 that will need to strengthen to meet a covenant minimum of 45 days beginning in fiscal 2020. Historically weak financial practices with audit findings and restatements, the absence of a written Administrative Services Agreement between the school and the Foundation for overhead charges, and the lack of board adopted financial or debt policies are also factored into the rating. The rating further incorporates projected debt service coverage of around 2x. Debt is amortized over thirty-five years, with essentially level payments and 14% of principal repaid within ten years. Positively, the school has a long operating history with four charter renewals with the Apple Valley Unified School District.

RATING OUTLOOK

The stable outlook reflects our expectation that improved operating results beginning in fiscal 2019 will continue, strengthening the school's operating margins and adding to liquidity. It also incorporates our expectation that transfers to the Lewis Center for administrative services will stabilize at an anticipated 12.5% of state per pupil revenues from historically varying amounts.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Significantly strengthened and sustained improvements to liquidity well above covenant minimum

- Elimination of audit findings and restatements

- Written Administrative Services Agreement and financial and debt policies

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Failure to renew charter, as expected, prior to July 1, 2020

- Failure to meet days cash covenant in fiscal 2020

- Transfers to Lewis Center for administrative services that significantly exceed expected levels

- Failure to maintain enrollment at current levels

LEGAL SECURITY

All of the charter school revenue bonds are payable from payments received pursuant to a Loan Agreement between the California Enterprise Development Authority and 17500 Mana Road LLC. (LLC), a limited liability company whose sole member is The High Desert "Partnership in Academic Excellence" Foundation. Under the Loan Agreement, the LLC will serve as borrower and owner of the charter school land and property.

The LLC will make debt service payments from pledged revenues, which consist of all revenues derived under a Lease Agreement with the High Desert "Partnership in Academic Excellence" Foundation, Inc. (the Foundation). Pledged lease payments in turn are secured by all revenues, to the extent permitted, of Academy for Academic Excellence. The Foundation is involved in a number of different initiatives: a second charter school, the Norton Science and Language Academy; the Goldstone Apple Valley Radio Telescope Radio Astronomy Program; the Apple Valley Center for Innovation and the Lewis Center Foundation. However, none of the revenues or resources of these programs are pledged to secure the Series 2020 bonds.

Legal provisions are relatively weak, with a debt service coverage requirement of 1.1x and a 45 days' cash requirement beginning in fiscal 2020. Should coverage or liquidity fall below these levels, a consultant must be hired. Covenants also include an additional bonds test requiring 1.1x coverage in the prior fiscal year of maximum annual debt service (MADS) exclusive of any payments on the Series 2020 bonds or a consultant report demonstrating not less than 1.2x coverage of MADS, exclusive of the Series 2020 bonds, for the three consecutive years. Coverage of less than 1.0x constitutes an event of default.

The bond reserve requirement, expected to be funded from bond proceeds, will equal the traditional, three-pronged test of the least of maximum annual debt service, 125% of average annual principal and interest, or 10% of the original principal amount. There is also a repair and replacement fund as determined to be required by a consultant.

The structure also benefits from a Lease Blocked Account Agreement under which the Foundation has agreed to immediately deposit with the Trustee any amounts received from the San Bernardino Office of Education. After deducting any amounts that do not constitute revenues of the school, the Trustee will then use available funds to make lease payments for debt service and any fees or deficiencies, prior to the return of funds to the Foundation. Notably, payments to the Lewis Center for Educational Research for administrative services for the school, are deducted from revenues of the school and have not been made subordinate to debt service payments. In the event of default, the bonds are additionally secured by a deed of trust on the school property.

In its Continuing Disclosure Agreement, the school covenants to file quarterly financials, an annual audit, annual enrollment and waiting list figures and hold an annual investor call.

USE OF PROCEEDS

Proceeds of the Series 2020A bonds will provide $3 million in new money for the construction of a new multipurpose room and the conversion of a cafeteria to science labs, and the resurfacing of a parking lot, and new soccer and track fields. Bond proceeds with also refund the Foundation's $4.86 million in Series 2012 bonds and a private sale leaseback loan, outstanding in the amount of $835,171. The taxable Series 2020B bonds will pay a swap termination fee of around $705,000 for a swap agreement with Union Bank associated with the Series 2012 variable rate bonds.

PROFILE

Initially opened in 1997 as an independent study program serving just over 200 students, the Academy for Academic Excellence (AAE) now serves 1,442 students in grades TK-12 on a large, 150-acre campus in Apple Valley, California, about one hour north of the City of San Bernardino. The school's charter with the Apple Valley Unified School District (A1) has been renewed four times, most recently in 2015 for the maximum term of five years expiring on July 1, 2020. The school's academic performance exceeds that of the district and is generally in line with state averages. AAE is one of two charter schools managed by the High Desert "Partnership in Academic Excellence" Foundation, Inc., which provides administrative services for the school. The Foundation also manages the Lewis Center for Educational Research, which operates a number of programs including the Goldstone Apple Valley Radio Telescope radio astronomy program to which students have access.

METHODOLOGY

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.

REGULATORY DISCLOSURES

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.

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
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