Arlington Higher Education

Transcription

1 Ratings Series 2014A Stable Outlook Contacts Humberto Patiño Senior Associate José Luis Cano Executive Director / ABS Joseluis.cano@hrratings.com HR Ratings ratified the LT rating of 1 with Stable Outlook for the A of Trinity Basin Preparatory 2. The ratification of the rating is the result of a positive trend observed on our main rating metrics, with an estimated debt service coverage ratio (DSCR) of 2.0x and years of payment in 5 for FY18. The rating is also based on the likelihood that TBP will maintain the observed level of the rating metrics in the years to come, taking also into consideration the recently opened Ledbetter campus and the students and revenues it will add; helping TBP to achieve the projected cash generation, which in our base scenario is used to early amortize the Ledbetter bonds. The observed financial results are a consequence of the School s capacity to continue with its expansion plan, in terms of enrollment, through acquisitions, construction and revamps of its buildings, along with more efficient spending and investments focused on the preservation of academic quality and motivating and retaining teachers. Also, TBP reduced the pressure on its liquidity by assuming the existing bonds of Ledbetter campus ($8.8m) with null debt service and accrued interests for two years coupled with the option to amortize it at a discounted amount. In the preliminary 3 results for FY18, DSCR and DSCR with cash reached 2.1x and 4.1x, higher 0.9x and 1.4x than our previous projections. For FY19 and FY20 we estimate that these metrics will reach an average of 1.2x and 4.3x, respectively, with amortization payments related to the revolving credit line and the long-term debt of new buildings including Ledbetter bond. We expect years of payment to temporary increase from 5.0 in FY18 to 8.1 in FY19 due to Ledbetter bonds. Our rating contemplates: growing student demand with 66.7% growth in enrollment capacity, TBP will continue with its cost control strategy, campus improvement in 2020 and compliance with accountability performance rating. Hence, HR Ratings does not expect a risk of charter revocation. Definition The issuer or issue with this rating provides moderate safety for timely payment of debt obligations. Maintains moderate credit risk on a global scale, with weakness in the ability to pay in adverse economic scenarios. The rating is based on the following credit rating drivers: DSCR and Years of Payment. Despite a projected temporary increase in years of payment, due to Ledbetter bonds, HR Ratings base scenario DSCR is expected to range between 0.6x and 1.8x over the five-years forecast period ( ), while DSCR with cash would range from between 1.9x and 6.6x. Years of payment would decline after the Ledbetter bonds amortization from 8.4 in FY19 to 5.5 in FY21. Enrollment Progress. TBP continued with its expansion plans in its current campuses with a growth rate of 12.9% in FY18 compared to 18.9% in FY17 and 9.6% projected in our previous base scenario. After the acquisition of the Ledbetter campus, enrollment is expected to accelerate in the forthcoming years, particularly in Dallas area, with an increase of 22.3% in FY19 and 6.6% in FY20. Additionally, the FY19 growth will be enhanced by a new building in Panola campus, in the Fort Worth area. Revenues and EBITDA. Our base scenario contemplates that the observed increase in revenue per student will continue at an average annual rate of 0.8% based on the assumption that the School achieves the required attendance average and accountability performance rating, which are the key elements to receive federal and state funds. However, EBITDA is expected to evolve at a slower pace due to the expected investment of the school in its teachers and academic programs. Long term debt structure. Our base scenario considers that the School will continue with its strategy of financing its expansion through long-term debt, reducing TBP liquidity pressures. Bond Covenants. TBP must comply with DSCR and days cash on hand levels as specified in the master indenture. Our scenarios assume that this will be the case. 1 The G indicates that the rating is based on a global scale. The rating is based on TBP s credit risk. 2 Finance Corporation, (TBP or the School). 3 FY18 results are based on preliminary audited results. Final results are not expected to show any relevant changes. Page 1 of 14

2 Main Factors Considered This report focuses on the qualitative and quantitative events related to TBP that took place within the last twelve months. Additionally, it incorporates revised projections of the School s financial statements. All of this resulted in the assigned rating and outlook. Due to the nature and the legal framework of the Series 2014 bonds, their credit rating is based on the general obligation rating of TBP. The analysis presented here corresponds to the fourth annual review of the credit rating of the bonds. (the School or TBP) is a non-profit organization that operates open-enrollment schools at six locations within Dallas and Fort Worth, Texas; operating under the laws of the State pursuant to a charter that became effective on October 1, 1998 and has been renewed through July 31, The School has been in operation for around 19 years, offering education to predominantly lower income students from pre-kindergarten 3 (PK3) through 8 th grade; reaching approximately 3,162 students combined within its five campuses for FY18 4. For more detail of the credit rating and its evolution, we recommend reading this and the previous reports available at our website Relevant Events The observed financial results for fiscal years 2015 through 2017 and preliminary numbers for FY18, reflect the capacity of TBP management to control the School s expenses, despite the growth in its operations. Furthermore, its debt strategy and loan structure have allowed TBP to continue with its expansion plans without putting its liquidity at risk. TBP closed its FY17 results above our last year s base scenario due to a higher ADA 5 than expected, which directly resulted in higher federal funds for the School, complemented with lower overheads or fixed expenses, as a consequence of a higher absorption of costs due to TBP s enrollment and operations growth, resulting on an EBITDA of $5.8m in FY17 (30.9% above our base scenario and 113.1% higher than FY16). The estimated results for FY18 also show that this positive trend continued with an expected EBITDA of $7.0m (21.1% above FY17 and 57.9% larger than last year s base scenario) and FCF of $7.1m (+51.8% vs. FY17). As a reference, the ADA closed FY18 at a level similar to FY17, 95.3%. TBP s ADA has never been under 95.0% of enrollment since The School continues to enhance the diverse strategies that it has implemented to maintain the observed ADA level; hence, our projected scenarios were estimated on the base of stable attendance ratios. The School complied with the covenants defined in the trust indenture with a DSCR of 1.7x in FY17 and 2.1x in the preliminary FY18 financial results. As a reference, the indenture establishes that this metric must be above 1.1x. For its part, an index of days of cash on hand of 98 in FY17 and 143 in FY18 compared to the 30 days that is required. HR Ratings is not projecting that the 143 days, observed in FY18, will be 4 FY18 = period between September 2017 and August 2018, which is aligned with the School year. 5 ADA = Average Daily Attendance. Is the most important variable to determine most of the funding that the School receives. Page 2 of 14

3 maintained due to the School s expansion and investments projects. However, based on TBP guidelines, we expect that the cash on hand will be maintained at similar levels of FY17. In May 2018, TBP incorporated the Ledbetter campus into its operations, the location of a previous charter school that surrendered its charter at the beginning of 2017 before the state could revoke it, as the TEA had placed it under scrutiny for falling below academic standards for three consecutive years. TBP purchased the campus for an estimated $8.9m by assuming the existing debt of the school. The acquired indebtedness consists of a long-term bond with no interest payments for two years and principal payments of $0.5m during that period. At the end of these two years, TBP will have the option of fully amortizing the bond at a discount to face value of 32.7%, transferring the debt to the trustee, or assuming debt service for the outstanding balance. Based on the estimated enrollment that the Ledbetter campus will add to TBP operations (around 500 students) coupled with the observed performance of the School, the received federal funds level and the required debt service, we estimate that the liquidity of TBP will not be impacted due to this transaction, maintaining its Debt Coverage Ratio (DSCR 6 ) close to 2.0x and reaching an average days of cash on hand 7 of 116 for FYs 2019 and In order to continue with its expansion plans, TBP started in FY18 the construction of a new building adjacent to the current Panola campus. The new investment will allow TBP to maintain a positive growth trend at this campus with an annual growth rate of 19.2% between 2018 and 2023, and almost triple its enrollment for the years to come, reaching an estimated 944 students in FY23 (vs. 329 observed in FY18). The School calculates that the new building will be ready for the beginning of next school year which starts in August 2019, increasing by 22.3% the number of students in all the campuses in FY19 and 6.6% in FY20. TBP estimates that the total required investment for the new building will be $5.3m. Thus far, the School has already spent $3.9m in FY18 and which was financed through a long-term loan obtained in the same period. TBP reduced its operating leases by exercising its purchase option on the Panola campus for a total amount of $2.8m in October Since the Panola campus was one of TBP s largest lease contracts, after the transaction the School decreased its rentals and operating leases to $0.9m in FY18 (25.3% lower than FY17). As estimated in our prior year analysis, TBP used its own cash balance to source the acquisition of the campus. With the additional facilities that TBP is incorporating, it is expecting to enroll around 442 additional students in their Dallas campuses and 263 more in its Fort Worth District for a total of 705 more students enrolled in the school year (22.3% higher than ). If the assumed enrollment level 8 of 3,867 students in all the campuses is reached by the end of FY19, it would represent 76.9% of TBP capacity (5,026 students considering that the current ratio of students per classroom is kept). 6 DSCR calculated according the indenture is EBITDA divided by Debt Service, considering in Debt Service all long-term obligations. 7 Days of cash on hand is Cash and cash equivalents over Total Operating Expenses plus Net Interest Payments per 365 days. 8 Based on the guideline of the School. Page 3 of 14

4 The defined enrolled target for is considered achievable based on the 3,537 returning/complete registration students (91.5% of the defined target) observed a month before the beginning of school year , with a waitlist of 752 students (184 in Dallas and 568 in Fort Worth). As expected, TBP obtained Met Standard in and Accountability Ratings 9 of the TEA, achieving the target of each of the four indexes. Is important to highlight that the School has never been at a substandard performance level and we believe that the risk of the School losing its charter s license is minimal, since the Texas Education system requires three years below academic standards to revoke a charter's license. Based on TBP's Academic Program and the information provided by the School, it is probable that TBP will continue achieving Met Standard in its Accountability Rating for the years to come. HR Ratings will continue monitoring the official publication of the rating. The 2014 Series Bonds, which represented 62.2% of TBP s total debt in FY18, have the guarantee of the Permanent School Fund (PSF). This guarantee reduced the interest rate of the bonds and secures all payments of principal or interest. If the School uses the guarantee, it has the obligation to refund PSF the disposed amount. It is important to mention that the existence of this guarantee is not incorporated in this credit rating. The rating is subject to changes based on the following credit risks: o o o o o o o TBP inability to continue meeting its enrollment and ADA targets for the school years to come. The Ledbetter campus does not achieve its academic and enrollment objectives. Inability to meet any required payments on the revolving credit line. Changes in state funding levels, or statutory changes in state open-enrollment charter School funding. Deterioration on the School s FCF generation that could result on the impossibility to maintain days operating cash above 30 days through the life of the bonds, or adequate DSCR levels as required by the master trust indenture. Financial deterioration due to unforeseen circumstances. Revocation or non-renewal of the academy s charter s license. 9 The state accountability system assigns one of three academic ratings to each district and campus: Met Standard, Met Alternative Standard, and Improvement Required. The performance index framework combines results from STAAR assessments, graduation rates, rates of students completing the various graduation plans, and other indicators. Page 4 of 14

5 Appendix 1 (Base Scenario) Page 5 of 14

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9 Appendix 2 (Stress Scenario) Page 9 of 14

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13 HR Ratings Management Contacts Management Chairman of the Board Vice President Alberto I. Ramos Aníbal Habeica Chief Executive Officer Fernando Montes de Oca Analysis Chief Credit Officer Deputy Chief Credit Officer Felix Boni Pedro Latapí Public Finance / Infrastructure Financial Institutions / ABS Ricardo Gallegos Fernando Sandoval ricardo.gallegos@hrratings.com fernando.sandoval@hrratings.com Roberto Ballinez roberto.ballinez@hrratings.com / ABS Methodologies José Luis Cano Alfonso Sales joseluis.cano@hrratings.com alfonso.sales@hrratings.com Regulation Chief Risk Officer Head Compliance Officer Rogelio Argüelles Rafael Colado rogelio.arguelles@hrratings.com rafael.colado@hrratings.com Business Development Business Development Francisco Valle francisco.valle@hrratings.com Page 13 of 14

14 Mexico: Avenida Prolongación Paseo de la Reforma #1015 torre A, piso 3, Col. Santa Fe, México, D.F., CP 01210, Tel 52 (55) United States: One World Trade Center, Suite 8500, New York, New York, ZIP Code 10007, Tel +1 (212) The rating assigned by HR Ratings LLC to the entity, issuer and/or issue is based upon the analysis performed under a base case and stress case scenario, in accordance with the following methodology(ies) established by the rating agency: Rating Methodology for Charter Schools Credit Risk Evaluation, February 13, Form 17-g (7): For more information with respect to this (these) methodology(ies), please consult the website: Complementary information Previous Rating., Stable Outlook Date of the last Rating Action. August 9, 2017 Period of the financial information used by HR Ratings for the assignment of the current rating. Main sources of information used, including third parties. Ratings assigned by other rating agencies that were used by HR Ratings (if so). HR Ratings considered at the moment of assigning or reviewing the rating, the existence of mechanisms designed to align the incentives between the originator, servicer and guarantor and the possible buyers of the rated instrument (where it applies). Audited data from FY2009 through FY17. Preliminary information for and projections through Information provided by Trinity Basin Preparatory, the National Alliance for Public Charter Schools and Texas Education Agency. N.A. N.A. *HR Ratings, LLC (HR Ratings), is a Credit Rating Agency registered by the Securities and Exchange Commission (SEC) as a Nationally Recognized Statistical Rating Organization (NRSRO) for the assets of public finance, corporates and financial institutions as described in section 3 (a) (62) (A) and (B) subsection (i), (iii) and (v) of the US Securities Exchange Act of The rating was solicited by the entity or issuer, or on its behalf, and therefore, HR Ratings has received the corresponding fees for the rating services provided. The following information can be found on our website at (i) The internal procedures for the monitoring and surveillance of our ratings and the periodicity with which they are formally updated, (ii) the criteria used by HR Ratings for the withdrawal or suspension of the maintenance of a rating, and (iii) the procedure and process of voting on our Analysis Committee. 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It is estimated that the annual fees range from US$5,000 to US$2,000,00 (or the foreign currency equivalent). Page 14 of 14