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NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings affirms the 'BBB' rating for the following Florida Development Finance Corporation (FDFC) revenue bonds issued on behalf of Renaissance Charter School, Inc. (RCS):

--$57.1 million FDFC educational facilities revenue bonds (RCS projects), series 2010A;

--$10.9 million FDFC taxable educational facilities revenues bonds (RCS projects), series 2010B.

The Rating Outlook is Stable.

Fitch published an exposure draft proposing numerous amendments to its existing charter school rating criteria on July 19. If applied in the proposed form, the amended methodology would trigger a substantial number of downgrades to existing charter school ratings. Following the comment period and upon the publication of the new criteria, Fitch expects to place those schools at a heightened risk of downgrades on Rating Watch Negative. This may ultimately include all charter school ratings. Fitch would then conduct full rating reviews for those schools over the following six months utilizing the new criteria. The exposure draft is available at '[ www.fitchratings.com ]' or by clicking on the link at the end of the press release.

SECURITY

The bonds are paid from unrestricted revenues of the financed schools (Renaissance Elementary Charter School, Renaissance Charter School of St. Lucie, Duval Charter School at Arlington, North Broward Academy of Excellence, North Broward Academy of Excellence Middle School, and the 2010 Keys Gate Dorm Facility with students from Keys Gate K-8 Charter School). Additional bondholder protections include first liens on four of the facilities, a leasehold interest on the fifth, a debt service reserve fund, and a partial debt service guarantee from Charter Schools USA (CSUSA).

KEY RATING DRIVERS

CREDIT STABILITY DESPITE REVENUE WEAKENING: Enrollment continues to increase for the financed schools, offsetting a substantial decline in per pupil aid from the state of Florida in fiscal 2012. As anticipated, the GAAP margin for Renaissance Charter School, Inc. and Affiliated Schools (the combined entity, including the financed schools) weakened from prior years, but debt service coverage remained sound.

LIMITED FINANCIAL CUSHION: The financed schools' available funds offer very light protection in the event of consistent operating losses.

STRONG SECURITY PROVISIONS: Key structural elements of the transaction, including a favorable flow of funds and subordination of CSUSA's (the education management organization operating the financed schools) management fee continue to benefit bondholders.

CONTRACT RENEWALS REMAIN MANAGEABLE: CSUSA has a record of regular charter renewals and stable relationships with authorizers. Fitch also anticipates regular renewals of CSUSA's management contracts for the schools in the series 2010 transaction.

WHAT COULD TRIGGER A RATING ACTION

WEAKENING OF OPERATING MARGIN: Fitch anticipates modest improvement in the financed schools' financial performance in fiscal 2013. Deterioration of the combined entity's GAAP operating margin could trigger negative rating concerns given the schools' limited financial cushion.

UNEXPECTED ENROLLMENT VOLATILITY: Given the financed schools' high reliance on student-based state aid, enrollment declines could trigger negative rating action.

CREDIT PROFILE

STATE AID DRIVES OPERATING LOSS

In fiscal 2012, the state of Florida (general obligation bonds rated 'AAA' with a Negative Outlook by Fitch) sharply reduced per pupil aid by 10%. Per pupil aid provides 90%-95% of operating revenues for the financed schools. The decline led to weakening of Renaissance Charter School, Inc., and Affiliated Schools' (the combined entity) operating margin, which Fitch anticipated.

In fiscal 2011, the combined entity generated a consolidated operating margin of 1.8%. Fitch notes audited results for the financed schools are below year-end unaudited projections for fiscal 2011 provided to the agency last year. The combined entity's fiscal 2012 unaudited financial statements project the operating margin declined to negative 1.4%, though five of the schools performed better than budgeted. Fitch believes final audited results for fiscal 2012 may be closer to budget based on the changes noted above for fiscal 2011 projected and audited results.

For fiscal 2013, CSUSA reports the state's budget includes approximately 2% increases in per pupil aid for the financed schools. The budgets for the financed schools forecast improved performance versus the projected fiscal 2012 results, though a modestly negative GAAP margin for the combined entity is likely. Fitch views this forecast as achievable based on the increased state aid and promising enrollment trends (discussed below). Going forward, Fitch anticipates a return to at least breakeven operations for the combined entity by fiscal 2014 if state funding increases at the fiscal 2013 pace.

ENROLLMENT CONTINUING TO INCREASE

The fiscal 2013 budget assumes consolidated enrollment of 4,639 students versus 4,373 enrolled at the end of fiscal 2012 (6.1% increase), with increases across all financed schools. Fitch reviewed enrollment data provided by CSUSA as of early August indicating that 4,561 (98% of budget) were fully enrolled. In addition, more than 2,000 students were in various stages of the application and enrollment process for the financed schools. Given the strong pipeline, Fitch views the budgeted fiscal 2013 enrollment target as achievable.

COVERAGE REMAINS SOUND

In fiscal 2011, the combined entity's net income available for debt service (net income available) as calculated by Fitch covered annual debt service (ADS) by 4.1x and transaction maximum annual debt service (TMADS) by 1.0x. Despite the projected negative margin for fiscal 2012, Fitch calculates coverage of 1.5x ADS and 1.2x TMADS based on unaudited projections. Based on adopted budgets for the financed schools, Fitch anticipates ADS and TMADS coverage for the combined entity to remain relatively consistent.

Importantly, these coverage calculations include CSUSA's management fees, which are legally subordinated to debt service. Legal coverage per the bond documents excludes 50% of the fees from operating expenses. In fiscal 2012, CSUSA's management fees totaled an estimated $3.5 million, with a similar level budgeted for fiscal 2013. Adjusting for 50% of these fees, TMADS coverage would improve to an estimated 1.5x in fiscal 2012.

MODEST BUT STEADY FINANCIAL CUSHION

Available funds (cash and investments of the combined entity that are not restricted) for fiscal 2011 of $4.3 million covered consolidated operating expenses by 14.2% and total debt by 6.3%. In fiscal 2012, unaudited financials indicate that total available funds increased to a projected $5.2 million. Coverage of operating expenses improved modestly to 15.8% while coverage of debt improved to 7.7%. These metrics remain very light, but are relatively stable.

The financed schools generated the improvement despite the significant decline in state aid, due to enrollment growth and expense management. CSUSA prudently held back on discretionary spending during fiscal 2012 and used one-time revenues from the federal government for a one-time salary retention bonus for its staff, rather than a baseline salary increase.

CONTRACTS REMAIN STABLE

Charters for the financed schools expire between 2015 and 2026. RCS and CSUSA have never had a renewal application rejected. CSUSA's management contracts for the financed schools expire beginning in 2015, with automatic five-year renewals thereafter. Fitch fully expects regular renewals through final maturity of the series 2010 bonds. Academic performance will likely be a key factor in charter and management contract renewals.

During the last school year (fiscal 2012), all but one of the financed schools received at least a 'B' from the state Department of Education. DCSA earned a 'C' for the second consecutive year. Positively, Fitch notes that CSUSA replaced the principal with a former CSUSA administrator with successful experience working with similar student populations. Fitch will closely monitor CSUSA's ability to maintain strong academic and financial performance at the financed schools, particularly as the organization continues its increasingly rapid national expansion efforts.

Additional information is available at '[ www.fitchratings.com ]'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from Charter Schools USA.

Applicable Criteria and Related Research:

'Revenue-Supported Rating Criteria', June 12, 2012;

'Charter School Rating Criteria', July 19, 2012;

'Charter School Rating Criteria: Exposure Draft', July 19, 2012;

'Fitch Affirms Renaissance Charter School, Inc. (FL) Series 2010 Rev Bonds at 'BBB'; Outlook Stable', Aug. 25, 2011.

Applicable Criteria and Related Research:

Charter School Rating Criteria: Exposure Draft

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684036 ]

Charter School Rating Criteria

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684394 ]

Revenue-Supported Rating Criteria

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015 ]

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