Fitch Rates 1st Missouri Charter School Bond.

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 16, 2002

Fitch Ratings assigns a 'BB' rating to the Health and Educational Facilities Authority of the State of Missouri's approximately $5.4 million educational facilities revenue bonds (St. Louis Charter School (the school), series 2002A and taxable series 2002B. The bonds are expected to be sold during the week of Aug. 19 on a negotiated basis via Morgan Keegan & Co., Inc. The sale is expected to be a limited offering to qualified institutional buyers under Rule 144A or accredited investors under Regulation D of the Securities Act of 1993, as amended. Scheduled to mature over 20 years, the bonds principally will refinance loans used by the school to renovate and equip its two classroom buildings on land in St. Louis subleased from a private developer and owned by the State of Missouri. A debt service reserve also will be funded. The Rating Outlook is Stable.

The nonprofit public charter school has exhibited outstanding enrollment growth and student retention since opening its doors in fall 2000. Administrators believe that the school benefits from a growing reputation for high-quality academic services, strong relationships with parents, small class sizes, and a safe learning environment when competing for students with St. Louis's public school system and the area's extensive network of private, including religiously affiliated, schools. Financial projections indicate that the school could fund operations and projected debt service even with the 908 kindergarten through eighth grade students expected to enroll for its 2002-2003 academic session, which begins on Aug. 26. Further enrollment growth to 930, the school's current capacity, seems likely by fall 2003. School forecasts indicate that 2.3 times (x) annual coverage of debt service and lease payments after management fees may be possible by fiscal 2006 with just 930 students, although Fitch generally believes that charter schools will plow cash flow surpluses into salaries or capital improvements, as their public school competitors tend to do, rather than the balance sheet. Management fees are subordinated below debt service payments in this bond structure. Salaries and benefits, the largest part of school expenses, reportedly are competitive for the area.

The relationship of the school and its community-based board with its contractual manager, Beacon Education Management, LLC (Beacon), a subsidiary of limited bond guarantor Chancellor Beacon Academies, Inc. (Chancellor Beacon, not rated by Fitch), benefits the institution in several ways: principally by allowing it access to curriculum expertise, economies of scale resulting from Chancellor Beacon's multiple Missouri schools, and increasingly skilled financial managers experienced in running charter schools in multiple states. Nevertheless, the dependence of the school on Chancellor Beacon, which remains unprofitable like some of its major competitors in the evolving school management industry, also creates a degree of credit risk. Should Chancellor Beacon, which expects its first cash-flow breakeven or positive year in fiscal 2003, ever be unable to provide services to the school, the school's board could seek to engage an alternate management company or manage itself. This hypothetical transition could be difficult in terms of staff and student retention and could also upset some established patterns of financial operations now managed by Beacon. The school's contract with Beacon runs through 2007; the school's five-year charter, sponsored by the University of Missouri-St. Louis (UMSL), runs through 2005, subject to renewal. Relations with UMSL are reported to be positive, evidenced by recent completion of an interim review, and required payments from the city school district reportedly have been timely.

Other credit risks of the school include its extremely limited liquidity ($336,135 at the end of fiscal 2001, before a projected net income loss for fiscal 2002, versus $6.2 million in unaudited GAAP-adjusted fiscal 2002 expenditures), its limited track record in retaining student enrollment, its completion of only one year with audited financial statements, and the probability that more charter schools will add to existing competition from nearby private and parochial schools (as well as other public schools). Parental demand for the school and/or Chancellor Beacon to provide high school services for graduating eighth graders is likely to intensify, although the school and its management company would have numerous options for providing such a service, if they chose to do this at all.

The Rating Outlook is Stable. A longer track record of building and sustaining enrollment, consistent with financial projections, could result in a rating or outlook improvement at some point during the next several years. Improved liquidity, successful charter renewal, and enhanced fundamentals for Chancellor Beacon might be necessary for any upgrade in future years to an investment-grade rating.

Securities rated in the 'BB' category are not investment grade. 'BB' ratings indicate that there is a possibility of credit risk developing. However, business or financial alternatives may be available to allow financial commitments to be met.