Standard & Poor's Ratings Services has lowered its long-term rating on Plymouth Educational Center Charter School, Mich.'s $12.7 million series 2005 public school academy revenue and refunding bonds to B-minus from BB-minus.
The outlook is negative. At the same time, Standard & Poor's withdrew its long-term rating on the school's series 2013 public school academy revenue and refunding bonds, because they never sold.
The downgrade reflect Plymouth's weakening in operations, below 1x maximum annual debt service (MADS) coverage, and extremely limited cash position. "In our view, Plymouth has essentially no operating flexibility, which is magnified by a sizable draw on the school's fund balance in fiscal 2014 that could result in a bond covenant violation, but that we don't expect to mature into an event of default so long as the school retains 50% of its excess revenues in future years," said Standard & Poor's credit analyst Avani Parikh.
In addition, in the past two years, Plymouth's enrollment and demand profile has softened as a result of continued economic pressures in Detroit and an increasingly transient population, with fall 2012 and 2013 enrollment coming in significantly below levels management had projected. Management indicates it has taken steps to reverse the decline, although the school does not have a waitlist to offset any fluctuations. "Given economic trends and competitive pressures, we expect enrollment stabilization, and resulting financial improvement, will take time," Parikh added.
As well, on Sept. 10, 2014, Central Michigan University (CMU) issued a notice of intent (NIR) to revoke Plymouth's charter as a result of the high school's recent classification as a priority school under the state's 2013-2014 top-to-bottom ranking list.
A priority designation means the school is in the lowest achieving 5% in the state. This is grounds for revocation according to the charter's terms contract, and the school has 30 days after receiving the NIR to respond.
Its response must include a plan and time line for correcting noncompliance. According to management, Plymouth expects to respond and already has undertaken staffing and curriculum changes to demonstrate an improvement plan.
Based on conversations with school management and CMU, which recently authorized a two-year charter renewal (before the release of the most recent academic results), the agency said it understands both parties expect to work cooperatively toward formulating the plan of correction.
Initially chartered in 1995 by CMU, Plymouth Educational Center Charter School is in Detroit, currently serving slightly more than 1,100 students in kindergarten through 12th grade for the 2013-2014 school year.
The negative outlook reflects increased credit risk from the notice to revoke the school's charter; and Plymouth's weakening operations, with limited balance sheet, enrollment, and demand flexibility to withstand such deterioration.
S&P could lower the rating within the one-year outlook period if Plymouth fails to improve operations from current deficit levels; enrollment declines further; liquidity fails to improve; or the school violates its bond covenant, with resulting bondholder action or potential acceleration.
In addition, it would lower the rating if the school is unable to formulate a plan of correction with CMU and there are more immediate concerns with regards to charter revocation.
If Plymouth can navigate the enrollment declines, test scores show satisfactory improvement such that CMU lifts its NIR, liquidity improves from current levels, operations rebound to cover MADS by at least 1x, and the unrestricted fund balance remains at a minimum level of compliance with bond covenants, it could consider revising the outlook to stable.
