BRADENTON, Fla. — In a rapid fall from grace, the popular Fulton Science Academy Inc. in Georgia has seen its BBB investment-grade rating plummet to CC less than seven months after issuing $19 million of bonds.
Fitch Ratings dropped the rating five notches on Monday, citing a high probability of default following the Georgia State Board of Education’s decision to deny FSA’s application to become a state charter school.
FSA sought a state charter after the Fulton County School District in December refused to renew its middle school charter.
The Alpharetta Development Authority issued bonds for the suburban Atlanta academy in October. Proceeds were to be used to build a campus where FSA ultimately planned to co-locate its elementary, middle and high schools. The bonds are secured by a first mortgage lien on the new campus.
The academy told Fitch that it would no longer participate in the rating process, the agency said Monday.
After the middle school charter expires June 30, Fitch said the facility likely would close, resulting in an immediate default that could lead to accelerated redemption provisions.
About two-thirds of bond proceeds are being held by the trustee, according to Fitch analyst Eric Kim.
“While these funds could be used to reimburse bondholders, it is unclear if and how the remaining one-third could be fully recouped in the event of accelerated redemption,” Kim said.
The Fulton Science Academy did not respond to a request for comment.
Shortly after the bonds were sold, the academy engaged in a dispute with Fulton school district staff over renewing its charter for a longer period than is typical. Subsequently, questions were raised by state officials over information about operations and conflicts of interest, according to local and state documents.
State education board members unanimously rejected FSA’s request for a state charter last week after receiving a lengthy report by staff detailing managerial and financial problems.
“The recent pattern of poor decisions by the FSA governing board led the state board to decide it could not trust them to avoid defaulting on their debt at any time, forcing the closure of the school, leaving students without a school in the middle of a school year and exposing the state to potentially $19 million in debt,” said state charter schools division director Louis Erste.
Though there are nearly 150 charter schools in Georgia, it is believed that only four have bond-financed projects since 2009. Erste said FSA’s troubles should not hinder the ability of other charter schools to seek financing.
“We are confident that future bondholders will continue to fuel the soon-to-be-expanding growth in charter school construction in Georgia,” he said. “Our goal is to protect not only the schools who may get themselves into financial trouble with an untimely bond deal, but limit the financial exposure of the local school district authorizers and the state, along with any consequent negative influence on local and state government credit ratings.”
Investors need to understand every aspect of a charter school transaction, especially the risk in the charter renewal process, according to Tom Kozlik, director and municipal credit analyst at Janney Montgomery Scott LLC.
“A key consideration for investors is to identify the type of relationship, formal and sometimes informal, the charter has with its charter authorizer,” Kozlik said. “It is imperative investors identify how important details and information flow are when buying charter school debt, even at the investment-grade level.”
