Published: March 09, 2011
Fitch Affirms HTH Learning's (California) Revs at 'BB+'; Outlook Stable
NEW YORK - (BUSINESS WIRE) - Fitch Ratings has affirmed the 'BB+' rating on the following series of
educational facility revenue bonds bonds issued by the California
Municipal Finance Authority on behalf of HTH Learning (HTH):
--$4.4 million (High Tech High projects), series 2008A (Media Arts);
--$18.5 million (High Tech High projects), series 2008B (Chula Vista);
--$350,000 (High Tech High projects), series 2008C (Chula Vista taxable).
The Rating Outlook is Stable.
RATING RATIONALE:
--The 'BB+' rating primarily reflects the limited nature of the revenue
pledge protecting bondholders and the need for established institutions
within the High Tech High group of schools (of which HTH is the parent)
to continue to subsidize High Tech High Chula Vista High School (Chula
Vista), which opened in August 2007;
--Counterbalancing the credit concerns are HTH's long operating track
record and market position as demonstrated by its growing enrollments,
especially at Chula Vista which has exceeded initial enrollment targets;
--HTH's financial plan remains vulnerable to unexpected changes in
enrollment and fairly aggressive expansion plans which have increased
its financial leverage. These concerns, however, are partially mitigated
by HTH's experienced management team and continued strong demand for its
schools.
KEY RATING DRIVERS:
--Maintenance of student demand and continued achievement of enrollment
targets;
--Continued ability of established HTH institutions to make the annual
subsidy to Chula Vista.
SECURITY:
The series 2008A bonds and the series 2008B and 2008C bonds (the bonds)
are separately secured. Lease payments received by HTH from High Tech
High Media Arts (Media Arts) secure the series 2008A bonds. Lease
payments received by HTH Learning from Chula Vista secure the series
2008B and 2008C bonds. Upon the repayment or refinancing of outstanding
senior series 2005 bonds (not rated by Fitch), which HTH covenants to
effectuate by Dec. 1, 2014, the bonds will be secured on a parity,
senior lien basis by gross revenues of HTH. Additional security
provisions include a deed of trust over the Chula Vista facility and a
cash funded debt service reserve.
CREDIT SUMMARY:
Student demand remains strong throughout the eight schools within the
High Tech High group (the Group). Since its opening at the beginning of
the 2008 academic year, Chula Vista, the second newest school within the
Group, and the beneficiary of the series 2008B and C bond proceeds, has
continued to experience significant enrollment growth. For the 2010
academic year, Chula Vista reached 606 students, exceeding its initial
projection of 530. Media Arts, which opened in 2004 and was the
beneficiary of the series 2008A bond proceeds, exceeded its 2010-2011
budget of 392, with 410 students currently enrolled. The older, more
established HTH schools are mostly operating at capacity, experiencing
moderate to flat enrollment growth over the past few years. Overall
enrollment at HTH's eight schools grew 31.5% to 3,799 in the 2010-2011
school year, from 2,890 students in 2008-2009. Enrollment growth has
been driven largely by the opening of new schools, including new middle
and high schools at Chula Vista and High Tech High North County (North
County), as well as expansion of existing schools such as Media Arts.
Strong enrollment growth enabled Chula Vista to generate a positive
operating margin over the past three fiscal years. Nevertheless, the
school still, as expected, requires a subsidy from the other HTH
institutions (excluding Media Arts) to meet its annual lease payment
obligation to HTH. HTH committed to provide up to $600,000 annually to
Chula Vista, which it fully provided in fiscal years 2008 and 2009, the
school's first two years of operations. As a result of the school's
success to date, HTH was able to reduce the subsidy in fiscal 2010 to
$550,000, with a further decrease to $500,000 expected for fiscal years
2011 and 2012. To the extent the subsidy is unavailable or insufficient,
or Chula Vista experiences unexpected enrollment declines, cash flows
available for lease payments may be insufficient to meet annual
obligations. Fitch views this risk as manageable at the current rating
level given the track record of enrollment strength and financial
stability at the various HTH schools. Similar to Chula Vista, Media Arts
has generated a breakeven to positive operating margin over the past
several years, driven also by solid demand and modest enrollment growth.
HTH relies upon conservative budgeting and financial management
practices to mitigate the impact of recent and expected future
reductions in per pupil operating revenues (PPOR) from the state of
California (general obligation bonds rated 'A-' by Fitch). As is typical
for charter schools, PPOR represents the largest funding source for all
Group schools, including both Chula Vista and Media Arts where PPOR
represented approximately two thirds of each school's fiscal 2010
operating revenue. Among other measures undertaken to offset declines in
PPOR (between 7%-12% depending on grade level) during fiscal 2010, HTH
management implemented salary freezes, reduced contributions to health
benefits, and initiated staff reductions across the Group. In addition,
most of the HTH schools utilized their extensive waiting lists to add
additional students to generate higher revenues. Consequently, debt
service coverage for the bonds continues to be basically in line with
projections. The lease payment paid by Media Arts to HTH provides
adequate coverage for its related debt service obligation. As discussed
above, Chula Vista requires a subsidy to meet its lease payment
obligation. Per the series 2008 loan agreement, HTH covered total debt
service on the bonds by a solid 1.56 times (x) in fiscal 2010, well
above the 1.20x minimum rate covenant
HTH's expansion plans over the past few years were fairly aggressive and
significantly increased its financial leverage. Debt currently
outstanding totals $68.4 million, up from just $13.3 million in fiscal
2006. It is currently constructing new elementary and middle schools on
the Chula Vista campus, which are scheduled to open in August 2011. To
date, these schools have received substantial interest, with
applications exceeding available spaces. HTH also added the new North
County high school and middle school, which are located in San Marcos,
California, in 2008 and 2009, respectively. The middle school is
currently operating in a temporary facility, and HTH intends to begin
construction on a permanent facility later this year. The Chula Vista
project is being financed with $12 million of qualified school
construction bonds (QSCBs, included in the $68.4 million debt figure
above) and gifts, which have already been raised. The North County
project is anticipated to be financed in the same manner, with $3.95
million of QSCBs expected to be issued later this year and $4.5 million
in gifts.
HTH Learning is the parent of the four-member HTH Group: High Tech High,
High Tech High Foundation, High Tech High Graduate School of Education,
and Explorer Elementary Charter School. High Tech High operates eight
public charter schools in San Diego County, California, including Chula
Vista and Media Arts.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (Oct. 8, 2010);
--'High Tech High Learning, California' (Feb. 15, 2008);
--'Criteria for Rating Charter Schools' (Jan. 23, 2007).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
High Tech High Learning, California (California Municipal Finance
Authority) - ser 2008A-C
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=372642
Criteria for Rating Charter Schools
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=311604
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DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
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IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
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THIS SITE.
Fitch Ratings
Primary Analyst
Colin Walsh, +1-212-908-0767
Director
Fitch,
Inc., One State Street Plaza, New York, NY 10004
or
Secondary
Analyst
Douglas J. Kilcommons, +1-212-908-0740
Senior Director
or
Committee
Chairperson
Laura Porter, +1-212-908-0575
Managing Director
or
Media
Relations:
Cindy Stoller, +1-212-908-0526
Email: cindy.stoller@fitchratings.com
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