LOS ANGELES—An Escondido, Calif. charter school foundation that went into technical default on its bonds in July 2012 received an improved outlook from Standard & Poor’s.
The 2012 technical default happened when the foundation’s debt coverage ratio dropped below the level required in covenants.
S&P revised its outlook to stable from negative on Nov. 8 and affirmed a BB-minus long-term rating on the $25.4 million in education revenue bonds issued for the American Heritage Education Foundation by the conduit California Municipal Finance Authority in 2006.
The foundation is a California non-profit public benefit corporation organized to provide educational programs and services for the Escondido Charter High School and Heritage K-8 Charter School, both in Escondido, Calif., north of San Diego.
“The revision to a stable outlook reflects the improvement in operations of the two charter schools,” said Standard & Poor’s credit analyst Robert Dobbins. S&P dropped the bond ratings from BBB-minus to BB-plus, giving the bonds a junk rating in June 2012; and then further downgraded them to BB-minus in September 2012.
In 2012, the foundation had to request that bondholders vote to waive the debt service coverage requirement or the $24 million still outstanding on the bonds would have been due immediately, according to filings on Municipal Securities Rulemaking Board’s EMMA website. Bondholders agree to modify the covenant so that acceleration upon technical default would be an optional provision, not mandatory, according to filings.
“Since violating the debt service covenant in fiscal 2011, the two charter schools, on a combined basis, have generated two consecutive years of strong operating margins and maximum annual debt service coverage,” Dobbins said. “Furthermore, the combined cash level of all three organizations has increased to a point that we view as very strong for the rating category.”
Despite the improved financial outlook for the charter school, S&P analysts said the BB-minus rating remains appropriate due to substantial enterprise profile and legal risks.
Escondido Charter High School, founded in 1996, was incorporated in 2001. Escondido’s original charter was approved by the Escondido Union High School District in 1996 and has been renewed three times; it is up for renewal again in April 2015, according to the S&P report. Heritage K-8 Charter School was opened in 2003 to serve as a feeder facility for the high school under a charter with the Escondido Union Elementary District.
