KIPP, Inc. (Texas) Downgraded by Fitch: Will Test Score Derivatives Be Next?

Now KIPP CEOs aka "school leaders" aka "principals" have more to pore over on Monday mornings than reports of children talking at school or going to the bathroom illegally, or even reports that test scores were flat last week.  Now they must worry about being too highly leveraged, narrow balance sheets, and escalating debt service.  

With reports of being downgraded to BB+ by Fitch, how will Wall Street hedge fund investors respond?  Will Gates shell out another $10 million?  Or will the plutocrats who favor segregated chain gang schools for poor children put heat on Texas legislators to up the ante for "public" charter schools in Texas???  From Business Wire:

Fitch Downgrades KIPP, Inc. (Texas) to 'BB+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded to 'BB+' from 'BBB' and removed from Rating Watch Negative the following revenue bonds issued by the La Vernia Higher Education Finance Corporation, TX:

--$64.2 million, series 2009A;

--$677.6 thousand, series 2009B (taxable)

The bonds are issued on behalf of KIPP, Inc. (KIPP).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien on revenues and a lien on and security interest in certain real property on which KIPP's Houston area schools are located. Additional security features include a debt service reserve fund, an additional bonds test, and a partial debt guaranty.

The bonds rank on parity with $32.9 million of outstanding series 2006A revenue bonds (not rated by Fitch). The bonds are also senior to outstanding Qualified Zone Academy Bonds (QZABs) and Qualified School Construction Bonds (QSCBs) in the amount of $34.8 million and $17.4 million, respectively.

KEY RATING DRIVERS

LEVERAGE METRICS DRIVE DOWNGRADE: The downgrade primarily reflects KIPP's high leverage position. This is evidenced by an elevated net income available to cover pro-forma debt metric and limited track-record of achieving at least 1 times(x) coverage of maximum annual debt service (MADS) from operations.

SOUND DEMAND AND ENROLLMENT TRENDS: KIPP's strong reputation supports consistently healthy student demand and enrollment trends, which provides some operational and financial stability.

NARROW BALANCE SHEET: KIPP's balance sheet provides a limited cushion to manage unanticipated budgetary pressures, although concern is somewhat offset by its track-record of consistently positive operating performance on a full accrual basis.

RATING SENSITIVITIES

STANDARD SECTOR CONCERNS: A modest financial cushion; substantial reliance on enrollment-driven, per pupil funding; and charter renewal risk are credit concerns common among all charter school transactions that, if pressured, could negatively impact the rating over time.

CREDIT PROFILE

LEVERAGE METRICS DRIVE DOWNGRADE

KIPP's pro-forma MADS of about $12.3 million, which conservatively excludes expected federal credit payments on outstanding QZABs and QSCBs, represents 14.6% of fiscal 2012 operating revenues. KIPP's limited track-record of achieving at least 1x MADS coverage from net operating income coupled with a moderately high pro-forma debt to net income available for debt service ratio (11.0x in fiscal 2012) are viewed as speculative-grade attributes. KIPP's expansionary plans, which are likely to be at least partly debt-financed, suggest that those leverage metrics will remain elevated over the intermediate term.

SOUND DEMAND AND ENROLLMENT TRENDS

KIPP enrollment has seen double-digit annual percentage growth in each of the past three years. Total headcount enrollment reached 9,551 students in academic year 2012-2013. These trends have been supported by stability at KIPP's mature schools and rising headcount at more recently established schools. At present, KIPP's enrollment base spans across nine campuses and 21 schools. This includes three schools that are managed by KIPP under partnerships with two local school districts. A new high school in KIPP's Northeast campus (already home to several KIPP primary and middle schools) is scheduled to open in academic year 2013-14.

In line with its long-term growth plans, management issued approximately $22.4 million of QZABs in late calendar year 2012 to develop, in various phases, a new primary, middle, and high school. Management reported that a healthy portion of students on KIPP's annual waitlist reside near the planned site, which should support the achievement of enrollment targets.

NARROW BALANCE SHEET

Available funds, defined by Fitch as cash and investments not permanently restricted, totaled $7.8 million at fiscal year-end 2012 and covered operating expenses and pro-forma debt by 9.6% and 5%, respectively. Fitch views KIPP's modest financial cushion as a negative credit factor, although some comfort is provided by its track-record of generating a positive operating margin (3.8% in fiscal 2012). Healthy operating results are bolstered by prudent financial management practices, which includes conservative per pupil revenue forecasting and budgeting for non-cash based expenses, namely depreciation and amortization. Fitch's review of interim fiscal 2013 operating results indicates another year of healthy performance.

One of KIPP's two state charters, authorized by the Texas Education Agency (TEA), expires in 2013. Fitch does not expect KIPP to encounter any challenges in the renewal process as management successfully amended this charter in August 2011, in a process similar to that of a charter renewal. In addition, KIPP successfully renewed its second charter in 2011, which marked its second consecutive renewal since 1996.

Fitch's actions are part of its completed industry-wide review, which commenced September of last year when Fitch placed all of its rated charter schools on Rating Watch Negative. Fitch will release an overview of its rating actions in a separate press release later today.

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.

Applicable Criteria and Related Research:

--'Charter School Rating Criteria' (Sept. 19, 2012);

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

--'Fitch Places All Charter School Bonds on Rating Watch Negative' (Sept. 19, 2012).

Applicable Criteria and Related Research

Charter School Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688957

Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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 SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Contacts

Fitch Ratings
Primary Analyst
Alexander Vaisman, +1-212-908-0721
Analyst
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Colin Walsh, +1-212-908-0767
Director
or
Committee Chairperson
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com