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Rating Action:

Moody's assigns initial Baa3 to Highline Academy Network's (CO) Charter School Revenue Bonds, Series 2022; outlook stable

18 Oct 2022

New York, October 18, 2022 -- Moody's Investors Service has assigned an initial Baa3 underlying rating to the Colorado Educational and Cultural Facilities Authority, CO's $15.6 million Charter School Revenue Bonds (Highline Academy Charter School Project) Series 2022A and $140,000 Charter School Revenue Bonds (Highline Academy Charter School Project) Federally Taxable Series 2022B. Following the sale, the bonds will be the only outstanding debt of Highline Academy Network. The outlook is stable.

RATINGS RATIONALE

The initial Baa3 underlying rating reflects Highline Academy Network, CO's solid operating position supported by positive governance and healthy financial operations. Following the interest only period which ends in fiscal 2024, proforma debt service coverage is projected to remain above 1.4 times though fiscal 2026. Operating margin will normalize in fiscal 2024 as federal coronavirus relief funds expire, though even modest out-year margins will continue to improve operating liquidity to around 150 days cash on hand by fiscal 2026. Inclusive of post-issuance debt and adjusted pension obligations, leverage equal to 2.4 times fiscal 2021 operating revenue is elevated. The rating considers the school's stable competitive profile which is supported by inclusion in a rapidly developing service area, stable enrollment, a strong waitlist, and recent charter renewal at the Southeast Campus; the Northeast Campus is up for charter renewal in June 2023. Expansion of middle school services in response to strong demand at the Southeast Campus is likely to drive the modest enrollment gains needed to meet fiscal projections.

The entirety of Highline Academy Network's operating revenue is pledged toward repayment of the bonds and the Southeast Campus is mortgaged for the benefit of bondholders. Fixed costs are anticipated to remain manageable post-issuance at around 10% of operating revenue, which, when coupled with the school's healthy and improving liquidity position, provides flexibility to address most operational challenges that could arise.

The rating also incorporates the legal structure of the Colorado Charter School intercept program legal structure, which includes a "lock box" and provides for monthly intercept of state aid revenues for debt service payments directly from the state treasurer to the Trustee, subject to annual appropriation of lease payments by Highline Academy Network.

RATING OUTLOOK

The stable outlook reflects our expectation that the school's healthy demand profile will support and maintain steady debt service coverage and liquidity during construction of the expansion of the Southeast Campus.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

-Reduction in leverage relative to operating revenue and liquidity

-Financial trends that outpace proforma projections and lead to materially improved days cash on hand and/or debt service coverage

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

-Construction delays that prohibit opening expansion space or material project cost overruns that weaken liquidity

-Trend of enrollment loss or material decline in state aid leading to erosion of operating liquidity and/or decline in debt service coverage

-Material increase in leverage either via debt or pension obligations

-Nonrenewal of Northeast Campus charter in 2023

LEGAL SECURITY

The 2022 bonds are being issued by the Colorado Educational and Cultural Facilities Authority, proceeds of which will be loaned to Highline Academy Building Corp., a Colorado nonprofit corporation organized for the purpose of serving as a borrower and owner of the network's land and property. Under the loan agreement, the Building Corp will make debt service payments from pledged revenue, which consists of all revenue generated by the network from charter school operations.

The structure benefits from the state's intercept mechanism, under which the State Treasurer, on a monthly basis, will pay debt service based upon 1/6 principal and 1/12 interest amounts, directly to the Trustee from first available state aid payments owed to Highline Academy Network. In the event of default, the bonds are additionally secured by a deed of trust on the Southeast Campus; the Northeast Campus is a facility leased from DPS and is not included in the mortgage security.

Bond covenants include a 40 days cash on hand requirement and annual debt service coverage of 1.1 times. If the liquidity or coverage covenants are not met, Highline Academy must retain a management consultant to bring the network back into compliance. Liquidity falling below 40 days cash on hand for two consecutive fiscal years or debt service coverage below sum sufficient in any single year in which liquidity falls below 100 days cash on hand constitute events of default.

Highline Academy has no plans to issue additional debt at this time. The additional bonds test requires projections that indicate net revenue equal to 1.1 times annual debt service for all new and existing debt, however, if liquidity exceeds 100 days cash on hand the coverage ratio requirement for additional parity debt falls to sum-sufficient.

USE OF PROCEEDS

Proceeds of the Series 2022 bonds will be used to construct improvements at the Southeast Campus, adding five additional classrooms, new flexible learning space, teacher support space including five new offices, renovation of two existing classrooms, storage, and gender-neutral restrooms. Proceeds will also refund the school's outstanding Public Finance Authority Charter School Revenue Bonds (Highline Academy Charter School Project), Series 2018, and fund the bond reserve fund at MADS.

PROFILE

Highline Charter School Network (HCS) is a public charter school network and nonprofit organized under the laws of the State of Colorado. HCS offers K-8 educational services across two campuses in the Denver City & County School District 1, CO (known as DPS), the network's authorizer. The school's academic program is based on the National Common Core Standards with social emotional health and character development taught in all grades.

The network's charter is in effect so long as the network operates two or more schools within the district and each campus is individually chartered by DPS. The network opened its first school in 2004 with the Southeast Campus which is authorized to serve grades K-8; the charter expires June 30, 2027. The Northeast Campus was opened in 2014 and is authorized to serve Pre-K-5th grade students; the charter expires June 30, 2023.

METHODOLOGY

The principal methodology used in these ratings was US Charter Schools published in September 2016 and available at https://ratings.moodys.com/api/rmc-documents/64397. Alternatively, please see the Rating Methodologies page on https://ratings.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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.moodys.com/documents/PBC_1288235.

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

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Kenneth Surgenor
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