Fitch Rates American Charter Schools Foundation, Michigan's $80.4MM 2007A Revs 'BBB'.

NEW YORK -- Fitch Ratings has assigned a 'BBB' rating to Pima County Industrial Development Authority's approximately $80.4 million of education revenue bonds, series 2007A, issued on behalf of the American Charter Schools Foundation (ACSF), a Michigan not-for-profit corporation. The fixed-rate series 2007A bonds will price via negotiation by RBC Capital Markets on or about Oct. 3. The Rating Outlook is Stable.

Proceeds of the series 2007A bonds will be applied by ACSF to finance and/or refinance the costs of acquiring ten existing charter school facilities; fund a debt service reserve fund equal to maximum annual debt service (MADS); and pay various costs of issuance.

The series 2007A bonds are secured by a joint and several pledge of revenues generated at each of the acquired campuses. Pledged revenues primarily consist of state payments made to ACSF based on enrollment levels. ACSF irrevocably directs the state treasurer to make and continue making state payments directly to the trustee so long as the series 2007A bonds are outstanding.

Strong structural and legal provisions were a key factor in the rating, which is above average for the sector. Bondholders benefit from a gross pledge of revenues as the trustee will first pay debt service on the series 2007A bonds prior to remitting, within two business days, remaining state payments to ACSF for payment of operating and other expenses. Under the transaction documents, all rents, revenues, and profits will be assigned to the trustee and there is a deed of trust on each of the ten charter school facilities (the facilities). Additional bondholder protections include the debt service reserve fund; a standard additional bonds test; and required annual certification of debt service coverage.

In addition to the structure, important transaction strengths include limited charter renewal risk, with only one formal renewal required over the thirty year bond amortization; no construction risk as the series 2007A bonds are financing the acquisition of ten already constructed schools; minimal start-up risk as all but one charter school has a multi-year operating history; revenue and enrollment diversity afforded by student headcount and related state payments generated by multiple locations; reasonable financial projections which do not require a significant growth in students to achieve debt service coverage; and the prominent role of Leona Arizona Management, L.L.C. (Leona), an experienced management company, which will be managing each of the charter schools. Part of the nationally recognized Leona Group, Leona is the largest education management organization in the state of Arizona serving approximately 7,000 students at the middle and high school grade levels. Leona's favorable reputation stems from strong, committed leadership and positive academic outcomes among students served.

Primary credit concerns include a high, though not unmanageable debt burden; limited liquidity; potential cost increases stemming from unexpected programmatic changes needed to best serve students at each school; the vulnerability of financial plan assumptions to unexpected downward trends in enrollment; and the potential for additional capital needs over the intermediate term to ensure facilities and programs remain competitive.

Underpinning ACSF's five-year financial plan were reasonable assumptions related to growth in student headcount and related state payments. This is atypical for most charter school transactions which typically require significant increases in students to service pro-forma debt obligations. Despite these more conservative assumptions, ACSF should achieve debt service coverage, based upon net revenues, of at least 1.20 (x) in most years. Leona's agreement to defer management fees in the event that the cash flows are insufficient to meet annual debt carrying charges was viewed favorably in the rating process.

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