(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 are:
--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 audited financials.
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 comment period.
Link to Fitch Ratings’ Report: Charter School Rating Criteria