(The following statement was released by the rating agency)
Sept 19 - Fitch Ratings has updated its Charter School Rating Criteria, incorporating the
proposals detailed in 'Charter School Rating Criteria: Exposure Draft' dated July 19, 2012, and
available at www.fitchratings.com.
The main proposals from the exposure draft that have been incorporated into the criteria
--Increased Emphasis on External Risk Factors
Fitch believes the operating model for charter schools exposes these entities to substantial
external risks that are often outside the direct control of management. These include political
risk, regulatory risk, and competitive risk. The agency will place greater emphasis on these
qualitative factors in assigning charter school credit ratings.
--Conditional School District Cap on Certain Charter School Ratings
Fitch will assess the strength of any mechanisms in place to prevent interruptions in the
flow of funds to charter schools when a school district serves as authorizer or as a
pass-through for per-pupil funding. Where such mechanisms are limited or non-existent, the
agency will cap the charter schools' ratings at the level of the school district.
--Operating History and Renewal Threshold
Given the fundamental nature of renewal risk, Fitch will rate as non-investment grade any
schools that have less than five years of audited operating history and no charter renewals.
This standard will also apply to transactions with multiple charter schools (pooled
transactions) such that only those schools that meet the threshold will be included in Fitch's
assessment of historical pro forma maximum annual debt service (MADS) coverage (see below for
more details). The only possible exceptions to this requirement will be when initial charter
terms exceed five years and Fitch can sufficiently assess a school's likelihood of renewal.
--Historical Financial Performance Expectations
Most charter schools lack the history of audited financial performance to support an
investment grade rating. The updated criteria identify a set of baseline financial attributes
Fitch considers appropriate in order to consider a charter school for investment grade. They
include sum sufficient pro forma MADS coverage, and pro forma MADS burden (as a percentage of
operating revenues) of 15% or less. Very few rated schools exhibit all of these attributes from
Fitch thanks the various external parties (including investors, underwriters, financial
advisors, and industry associations) who provided feedback during the exposure draft's comment
period. The agency reviewed and carefully considered all feedback. The updated criteria report
includes multiple results of the suggestions and clarification requests received during the
Link to Fitch Ratings' Report: Charter School Rating Criteria