Fitch Rates High Tech High Learning Revs 'BB+'

Business Wire, Feb 8, 2008

NEW YORK -- Fitch Ratings assigns a 'BB ' rating to the following series of revenue bonds issued by the California Municipal Finance Authority on behalf of High Tech High Learning (HTH Learning), the parent of a group of California nonprofit benefits corporations (HTH Group) operating public charter schools in San Diego County, California:

Series 2008A

--$4,395,000 Revenue Bonds (High Tech High Projects), (Media Arts);

Series 2008B

--$18,475,000 Revenue Bonds (High Tech High Projects), (Chula Vista);

Series 2008C

--$350,000 Revenue Bonds (High Tech High Projects), (Chula Vista Taxable).

The fixed rate series 2008A-C bonds (the bonds) are expected to price via negotiated sale in late February. Proceeds of the bonds will be applied, along with other available funds of HTH Learning, to finance the costs of constructing a new charter high school (HTH Chula Vista) in the city of Chula Vista; reimburse HTH Learning for capital investments made to build out the third floor of HTH Media Arts and improve other HTH Group facilities located on the main campus in the city of San Diego (the village campus); and fund a debt service reserve account, capitalized interest for twelve months, and various costs of issuance.

At issuance, the bonds will be separately secured. Lease payments received by HTH Learning from HTH Media Arts will secure the series 2008A bonds while lease payments received by HTH Learning from HTH Chula Vista will secure both the series 2008B and 2008C bonds. Revenues generated by HTH Media Arts from per pupil local and state funding are sufficient to cover lease payments required under the lease agreement. In the case of HTH Chula Vista, at current enrollment levels, revenues are not sufficient to cover lease payments necessitating a subsidy of up to $600 thousand annually from HTH Group institutions located at the village campus (excluding HTH Media Arts). This subsidy is subordinate to their requirement to pay debt service on outstanding senior lien series 2005 bonds ($13.3 million), which Fitch does not rate.

The lack of a broad, gross revenue pledge at issuance, which is typical of charter school financings, was a major credit concern. However, upon the repayment or refinancing of the series 2005 bonds, which HTH Learning covenants to effectuate by Dec. 1, 2014, the bonds will be secured on a parity, senior lien basis by gross revenues of HTH Learning. Additional parity bonds may be issued under certain conditions; however, debt secured by a lien on gross revenues senior to the bonds will not be permitted.

The 'BB ' rating reflects the limited revenue pledge supporting repayment of the bonds so long as senior bonds remain outstanding; HTH Chula Vista's significant reliance upon the up to $600 thousand annual subsidy during the start up and ramp up phase to make its lease payments to HTH Learning; the HTH Group's fairly aggressive expansion plans which may further increase financial leverage and complicate its operating model; the vulnerability to the overall financial plan to unexpected changes in enrollment levels, the primary determinant of charter school funding; and standard the risks regarding charter renewal for each HTH Group school every five years.

Incorporated in the 'BB ' rating is HTH Group's multi-year operating history and proven track record; a reasonable enrollment forecast, based upon experience, which underpins financial and debt service coverage projections; the strong track record of HTH Learning, as the charter management organization, in administering a unique project based academic curriculum; favorable demand trends and competitive position; revenue and enrollment diversity created by a multi-facility, now multi-city location; and the presence of a related foundation (HTH Foundation) which solicits important philanthropic support for the HTH Group from local contributors and national corporate and non-profit donors.

Projected coverage levels for the series 2008B and 2008C bonds are fairly thin (about 1.2 times (x) in most years through fiscal 2012) and achieved only as a result of the up to $600 thousand annual amount being available. To the extent HTH Group village schools (except HTH Media Arts) are financially unable to provide this subsidy and or projected enrollment at Chula Vista materializes at a slower than expected pace, cash flows available for lease payments may be insufficient to meet annual obligations. Fitch views this risk as manageable at the current rating level as the HTH Group village schools (except HTH Media Arts) have historically generated revenues sufficient to cover series 2005 debt service and the additional up to $600 thousand commitment. In the case of the series 2008A bonds, the strength of projected coverage levels (minimum 2.6x through fiscal 2012) is tempered by the narrow scope of the pledged revenues derived solely from HTH Media Arts lease payments and the lack of a mortgage on the facility in favor of bondholders. Achievement of projected enrollment levels at HTH Media Arts is therefore critical.