WASHINGTON — Almost $24.75 million of limited obligation revenue bonds issued in 2005 and 2010 for the Old Redford Academy charter school in Detroit could become taxable and have been downgraded by Standard & Poor’s because the Internal Revenue Service revoked the school’s foundation’s tax-exempt status.
Standard & Poor downgraded to BB from BBB- its ratings on the bonds and placed the ratings on CreditWatch with negative implications.
The rating downgrade was issued Wednesday on the heels of an event notice the charter school filed with the Municipal Securities Rulemaking Board’s EMMA system disclosing that the tax-exempt status of its foundation, the Clothilde R. Charitable Foundation, was revoked by the Internal Revenue Service on Nov. 15, 2011.
The IRS took the action after the foundation failed to file Form 990s on its finances with the IRS for fiscal years ending June 30, 2009, 2010 and 2011, according to the event notice.
Standard & Poor’s credit analyst Avani Parikh said in a release, “The rating actions reflect our view of Old Redford Academy’s adequate, but weak financial metrics in conjunction with the increased credit risk posed by the IRS’ revocation of the tax-exempt status of the Clothilde R. Smith Chartiable Foundation, the school’s foundation.”
According to the bond documents for the 2002 and 2005 bond issues, the loss of the foundation’s tax-exempt status constitutes a covenant violation, which could lead to an event of default, unless corrective action is diligently pursued and taken with 45 days of written notice from the trustee, the rating agency said.
A default could result in the immediate acceleration of the bonds, it said.
The trustee has not yet issued such a written notice, Standard & Poor’s said.
In the event notice, Old Redford Academy said that the foundation has asked the IRS to reinstate it’s tax-exempt status retroactively “to avoid any unintended consequences to the tax-exempt status of the bonds.”
It said the foundation has filed the late Form 990s and has modified its procedures to avoid a similar situation in the future.
Almost $10.9 million of tax-exempt bonds, along with $235,000 of taxable bonds, were issued in December 2005 by the Michigan Public Educational Facilities Authority, now the Michigan Finance Authority, to finance the construction and renovation of charter school facilities.
Some of the bond proceeds were used to purchase the right to receive lease payments from Old Redford Academy, under a lease financing agreement between the authority, the charter school and the foundation.
NatCity Investments, Inc. and Robert W. Baird & Co. underwrote the bonds and Dickinson Wright PLCC was bond counsel.
In November 2010, the authority issued $13.88 million of tax-exempt bonds, along with $405,000 of taxable bonds, for construction and renovation of charter school facilities as well as the refinancing of previously issued bonds. The foundation financed the costs of the projects and issuance costs through the lease financing agreement. The charter school leased the middle and high school facilities from the foundation, according to bond documents.
Those bonds were underwritten by Baird. Dickinson Wright was bond counsel.
In its rating release, Standard and Poor’s said it will continue to monitor the tax and financial issues associated with the bonds.
The charter school expects the IRS’ final decision on its tax-exempt status within the next 90 days, it said.