New York, November 18, 2021 -- Moody's Investors Service has assigned initial Baa2 underlying ratings to Littleton Academy, CO's Charter School Refunding and Improvement Revenue Bonds (Littleton Academy Charter School Project) Series 2021A and Charter School Refunding and Improvement Revenue Bonds (Littleton Academy Charter School Project) (Federally Taxable) Series 2021B. The bonds will be issued in the expected par amounts of $8.8 million and $115,000, respectively. Moody's has also assigned a Aa3 enhanced rating to the Series 2021 Bonds. The underlying rating's outlook is stable.
RATINGS RATIONALE
The Baa2 underlying rating reflects the 25-year operating history of this small, fully enrolled K-8 school with 455 students and a substantial waitlist. Academic achievement levels exceed both those of the district and the state and will remain strong supported by an established, core knowledge curriculum and instructional practices. Financial performance is satisfactory, with debt service coverage of around 2x, although this is projected to decline to 1.2x inclusive of the current new money issuance of up to $6.5 million. Days' cash is also sound with over 200 days' cash, with this figure projected to increase supported by continued operating surpluses.
The school's favorable management is a key credit driver, with a record of successful board member replacements through at-large parent elections. A strong working relationship with the school's authorizer, Arapahoe County School District 6 (Littleton Public Schools), has facilitated a charter contract with automatic five-year extensions through fiscal 2033; a share of the district's mill levy override revenues; and the district's contribution of $5 million in general obligation unlimited tax (GOULT) bonds, approved by district voters, to the school's expansion project. The school's leverage, inclusive of adjusted pension obligations, is elevated but will remain manageable given no additional borrowing plans.
The Aa3 enhanced rating reflects the Colorado's Treasury Department's expected determination that the bonds qualify for Colorado's Charter School Moral Obligation Program. Colorado's Charter School Moral Obligation Program provides debt service reserve replenishment or direct payment of debt service by the program, if necessary. The assignment of the Aa3 enhanced rating is contingent upon the planned issuance through the Colorado Educational and Cultural Facilities Authority and participation in the Colorado Charter School Moral Obligation Program. 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 underlying rating's stable outlook reflects our expectation that financial performance and debt service coverage will remain sound, supported by full enrollment.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
- Sustained improvement in key financial metrics including debt service coverage and liquidity
- Successful charter renewal through end of bond maturity
- Reduction in leverage
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
- Declines in enrollment
- Weakening in academic performance or market demand
- Erosion of financial performance below current projections
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 Littleton Academy Building Foundation (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 Littleton Academy 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 Littleton Academy'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. 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 2021 bonds and a Deed of Trust in the school property.
The Additional Bonds Test (ABT) requirement is weak. Under the Indenture, the corporation may issue additional debt by demonstrating either (1) an investment grade rating at time of issuance of additional debt, or (2) projected net revenues showing 1.1x MADS upon project completion. There is no historical ABT coverage requirement.
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.
The enhanced rating on the Series 2021 Bonds reflects the benefits of the Colorado Charter School Debt Service Reserve Fund Program (CCSDSRF) under the state's Moral Obligation Program. This is a separate reserve, held by the State Treasurer, which is available to pay debt service on participating charter school debt. As of May 31, 2021, the balance in the CCSDSRF was $8,294,672 (including $794,672 in interest earnings to date), and the balance in the Interest Savings Fund was $6,936,927, including $6,107,014 paid in by the participating schools plus $829,913 in interest earnings to date.
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 and the State Treasurer 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. The Colorado Charter School Moral Obligation Program is open to charter schools that have issued bonds through the Colorado Education and Cultural Facilities Authority and have received an underlying investment grade rating.
USE OF PROCEEDS
Bond proceeds will refund the school's Series 2006 bonds, with $3.6 million currently outstanding. New money proceeds will fund a $6.5 million project fund deposit to fund construction of a 15,000 square foot expansion of the school's existing building, including the addition of a full-size gym and improvements to comply with the American with Disabilities Act (ADA) and fire code requirements. Bond proceeds will also fund a debt service reserve fund equal to MADS.
PROFILE
Initially opened with full enrollment in the fall of 1996, Littleton Academy continues to serve 455 students in grades K-8. Academic performance is strong, with outperformance of both the district and the state, and the school maintains a substantial waitlist of more than twice total enrollment. Management is favorable, with established term limits for board members and a successful history of member replacements, with board members elected by an at-large vote of school parents. Additionally, the school benefits from a strong working relationship with its district authorizer, Arapahoe County S.D. 6 (Littleton PS), CO (Aa2 stable), facilitating its share in the district's mill levy override for operations and technology. The district is also issuing $5 million in GOULT bonds authorized by district voters, to contribute to the project. Littleton Academy's strong performance has facilitated a favorable charter contract with the district with automatic five-year extensions through fiscal 2033.
METHODOLOGY
The principal methodology used in the underlying ratings was US Charter Schools published in September 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1039451. The principal methodology used in the enhanced ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments Methodology published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1298498. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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.
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