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Rating Action:

Moody's assigns initial Baa3 to Compass Academy Charter School, TX's $15.75 million series 2019A and 2019B; stable outlook assigned

14 May 2019

New York, May 14, 2019 -- Moody's Investors Service has assigned an initial Baa3 rating to $15.25 million Education Revenue Bonds (Company Academy Charter School, Inc.), Series 2019A and $500,000 Taxable Education Revenue Bonds (Compass Academy Charter School, Inc.), Series 2019B of Compass Academy Charter School. Concurrently, we have assigned a stable outlook. The conduit issuer is New Hope Cultural Education Facilities Finance Corporation. Upon issuance of the series 2019A&B revenue bonds, the total debt outstanding will be approximately $29.4 million when including parity obligations of $13 million issued in fiscal 2016. Moody's does not rate the Series 2016 A & B Education Revenue Bonds.

RATINGS RATIONALE

The Baa3 reflects the credit profile of Compass Academy, whose lease payments represent the security for the bonds under a loan agreement with New Hope Cultural Education Facilities Finance Corporation. In fiscal 2019, the school's enrollment equals 1,107 (K-10), and total fiscal 2018 revenues were nearly $9 million. The rating also incorporates the school's healthy financial performance, strong academics, growing enrollment and wait list. Liquidity is adequate with 189 days cash on hand providing operational flexibility.

The rating incorporates the narrow coverage of a pro forma 1.18x maximum annual debts service based on fiscal 2018 financials, inclusive of temporarily restricted revenues as allowed by Texas Education Code. However, as fiscal 2019 comes to a close, the coverage of MADS is expected to improve to 2.49x. The rating also reflects the high leverage of the school following the issuance of the series 2019A&B bonds, with spendable cash and investments to debt of a low 14% based on fiscal 2018 financials.

RATING OUTLOOK

The stable outlook reflects our expectation that the school will maintain adequate liquidity, solid demand, satisfactory financial performance, and academic achievement that is much stronger than its chief competitor, the public school district.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Full enrollment with demonstrated market demand that exceeds capacity

- Meeting revenue and debt service coverage projections

- Sustained out performance of academic standards relative to competing schools

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Failure to attain full enrollment

- Failure to improve operating margins and financial performance consistent with projections

- Material declines in liquidity

- Substantive increase in debt without commensurate increase in resources

LEGAL SECURITY

The revenue bonds are limited obligations of New Hope Cultural Education Facilities Finance Corp. payable solely from revenues to be derived from the loan agreement with the school, the related Series 2019 bonds, the money and investments held for the credit of the funds and accounts established under the bond indenture (except the rebate fund), the loan agreement and the master indenture. Under the master indenture, all of the bonds are secured by the pledge and assignment of a security interest in the trust estate. The trust estate consists of the school's gross revenues including all operating and non-operating revenues of the school, including state revenue, federal and local fund for school lunches and other food programs, special education, and transportation, including accounts receivable. Additionally, the school executed a deed of trust encumbering the property of the school, including all future improvements. Approximately 90% of pledged gross revenues consist of state Foundation School Program (FSP) revenues.

The bond covenants include a 1.1x debt service coverage ratio starting on June 30, 2019, and a liquidity test of 40 days cash on hand for the prior fiscal year. If the school is unable to meet either of these covenants, the school is required to hire an independent management consultant to review and analyze operations, submit written reports, and make such recommendations, as to the operation and administration of the school as the consultant deems appropriate.

Additional covenants include an additional bonds test which requires a historical coverage ratio for the prior 12 months of at least 1.1x and a projected coverage ratio that requires MADS for all outstanding debt to be less than 20% of available revenues for the most recent year or 1.1x MADS including all parity debt as well as the additional debt. Covenants also include a debt service reserve fund funded at the lesser of MADS, 125% of average annual debt service or 10% of initial principle, which will be funded from bond proceeds.

Extraordinary redemption provisions include 100% plus interest to the redemption date if the project is damaged, destroyed, condemned or threatened to be condemned if the project is not reconstructed, repaired or replaced from insurance or condemnation proceeds.

Events of Default are limited to failure to pay, failure to perform a covenant, false or misleading or erroneous material information that continues for 60 days upon notification. An event of default is not triggered if corrective action is taken within the 60 days. So long as the school is in full compliance with its obligations, including following, to the fullest extent practicable, the recommendations of the independent management consultant, it will not constitute an event of default if the debt service coverage ratio for any testing date is less than 1.1x for the prior fiscal year, except to the extent such debt service coverage ratio is less than 1x for any fiscal year or below 1.1x for two consecutive fiscal years.

USE OF PROCEEDS

The bonds will be used to build a 59,000 square foot athletics and fine arts facility at its existing campus which will include a competition gymnasium, locker rooms, weight room, auditorium, band room, choir room, support classroom space, and lunch commons area for grades 6-12.

PROFILE

Compass Academy Charter School is an independent charter school founded in 2011, located in Odessa, Texas. The school currently provides education for kindergarten through 10th grade and expects to add an additional grade through 12th grade, reaching full enrollment of 1,560 in fall 2023.

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 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.

Frederick Cullimore
Lead Analyst
Regional PFG Northeast
Moody's Investors Service, Inc.
One International Place
100 Oliver St Suite 1400
Boston 02110
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Helen Cregger
Additional Contact
Regional PFG West
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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JOURNALISTS: 1 212 553 0376
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