Standard & Poor's Ratings Services said it lowered its long-term rating to BB-plus from BBB-minus on the Michigan Finance Authority's series 2012 limited obligation revenue refunding bonds issued on behalf of Cesar Chavez Academy (CCA).
The outlook is negative.
"The downgrade and negative outlook reflect our view of CCA's approximately $1 million operating deficit in fiscal 2014," said Standard & Poor's credit analyst Ashley Ramchandani, "which we anticipate will result in a technical default with lease-adjusted maximum annual debt service (MADS) coverage of 0x and a budgeted operating deficit in fiscal 2015."
While the academy has maintained a relatively stable demand and enrollment profile, its recent expansion adding a new campus in East Detroit has weakened operations; once adjusted for one-time expenses associated with the expansion, operations are balanced, producing a lease-adjusted MADS coverage of 0.5x, violating the academy's 1.0x MADS coverage covenant.
"It is our opinion that the academy will not return to historical operating levels in the near term and we anticipate further deterioration to cash," added Ramchandani.
"The BB-plus rating and negative outlook also reflect our view of the academy's anticipated operating deficit of $1 million in fiscal 2014 and weak demographics due to its location in Detroit," she added.
The negative outlook reflects the expectation that during the two-year outlook period, CCA will experience a $1 million operating deficit in fiscal 2014 due to costs associated with its expansion and negative operations in fiscal 2015. The agency anticipates that cash levels will continue to deteriorate.
"Further negative rating action is possible if enrollment fails to meet projections such that the academy experiences significantly weaker operating performance than its planned $40,000 deficit on a cash basis for fiscal 2015," said Ramchandani. S&P does not anticipate a positive rating action during the two-year outlook period given the academy's anticipated operating deficit in fiscal years 2014 and 2015 and its extremely weak lease-adjusted MADS coverage.
