Fitch Ratings affirms the 'BB' rating on approximately $73.8 million series 2007A bonds issued by the Pima County Industrial Development Authority, Arizona (PCIDA). The bonds were issued on behalf of the American Charter Schools Foundation (ACSF).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a joint and several pledge of the revenues of the 10 ACSF schools in Arizona (collectively, the schools), which primarily consist of state aid based on enrollment. The bonds are additionally secured by a debt service reserve (DSR). The schools also make annual renewal and replacement deposits. Charter payments from the state are made directly to the bond trustee.

KEY RATING DRIVERS

WEAK FINANCIAL PROFILE: The rating reflects a history of break-even to slightly negative GAAP operations (although fiscal 2014 margins were stronger at 4%), a very limited financial cushion, a high debt burden and adequate, albeit limited, coverage of transaction maximum annual debt service (TMADS). ACSF's financial profile demonstrates characteristics consistent with a speculative grade rating.

ENROLLMENT ISSUES PERSIST: Aggregate enrollment at the schools fell 12% in fall 2014, with nine out of 10 schools experiencing a decline. In the prior two years enrollment had grown modestly following three consecutive years of declines. Enrollment trends remain uneven among the 10 schools and the fall 2014 declines are a credit concern. Fitch takes some comfort that the charter management organization (CMO) has a track-record of managing expenses during enrollment fluctuations, although the prior declines were not as large.

STRUCTURAL BONDHOLDER PROVISIONS: Legal and structural security measures include a trustee intercept of state aid. This provides for payment of debt service before any pro-rata distribution of revenues to the schools, and contractual subordination of the CMO fee.

RATING SENSITIVITIES

MARGIN DETERIORATION: Should ACSF's operating margin deteriorate, causing TMADS coverage to fall below 1.0x, or further weakening of already slim balance sheet resources, negative rating pressure is likely. Fitch expects TMADs in fiscal 2015 to be pressured, but to be similar to results in fiscal 2013. Weaker margins or lower coverage could trigger a negative rating action.

ENROLLMENT AND RENEWAL PRESSURES: Failure to stabilize enrollment and generate operating and balance sheet results in fiscal 2015 at least consistent with fiscal 2013 results could negatively pressure the rating. Fitch will monitor charter renewals for the 10 schools, all of which currently expire in 2017 or 2018.

STANDARD SECTOR CONCERNS: A limited financial cushion, substantial reliance on enrollment-driven, per-pupil funding and charter renewal risk are credit concerns common among all charter school transactions which, if pressured, could negatively impact the rating.

CREDIT PROFILE

ACSF is composed of 10 high schools, nine of which operate in the Phoenix, AZ metropolitan area. The tenth school operates in Tucson. Enrollment in fall 2014 was 3,800, down from 4,083 the year before. All of the 10 bond schools are alternative schools except for South Ridge High School. The schools maintain independent charters from the Arizona State Board of Charter Schools (ASBCS). Each charter has a 15-year term (which is standard in Arizona) and expires in 2017 or 2018. Fitch notes positively that the schools currently remain in good standing under their charters and the authorizer reports a positive working relationship with the operator. Seven of the schools' charters are up for renewal in 2017; the remaining three are in 2018.

The ACSF bond schools each maintain management agreements with the Leona Group, one of the largest CMOs in Arizona. At this time, Leona manages approximately 60 charter schools nationwide, including 26 in Arizona (including the 10 bond schools), as well as schools in Michigan, Ohio, Indiana and Florida. Leona maintains dual headquarters in Arizona and Michigan. In Arizona, neither ACSF nor the Leona Group plan to open any new schools in the 2016 academic year.

SLIM OPERATING PERFORMANCE

The 'BB' rating indicates an overall financial profile that Fitch considers to be consistent with a non-investment-grade rating. ACSF's GAAP operating margin varies year to year. Margins were positive 4.1% in fiscal 2014, compared to negative 1.1% in fiscal 2013 and negative 1.3% in 2012. Margins averaged 0.12% between fiscal years 2009 - 2014. Due to fall 2014 enrollment declines, management projects fiscal 2015 operating results to be balanced, but closer to fiscal 2013 levels.

The ACFS bond schools, as a group, have generated slim but positive transactional MADS coverage in each of the last six years. Fitch defines TMADS as maximum annual debt service excluding a balloon payment in the last maturity, typically funded from the DSR. TMADS coverage was 1.4x for the fiscal year ending June 30, 2014, which compared to 1.1x in both 2013 and 2012. For the current 2015 budget year, the CMO expects operating results to be weaker, closer to fiscal 2013 performance. The annual debt service coverage requirement is 1.0x sufficiency; a higher coverage level is required for issuance of additional bonds.

LIMITED BALANCE SHEET

In addition to slim operating results, ACFS has a weak balance sheet, both of which limit operating flexibility. Available Funds, defined as cash and investments not permanently restricted, improved slightly to $1.5 million at the end of fiscal 2014, up from $994,000 in 2013 and $1.37 million in 2012. However, fiscal 2014 available funds still represented a very slim 4.7% of operating expenses ($32.5 million) and 2.1% of outstanding debt ($73.8 million).

HIGH DEBT BURDEN

ACSF's slim operating performance and balance sheet cushion exacerbate concerns about the foundation's high debt burden. TMADS of $5.6 million represented 16.5% of fiscal 2014 operating revenues, consistent with recent years. No additional debt is planned for the ACSF schools at this time.

ENROLLMENT STRESSES OPERATIONS

Enrollment fell 12% in fall 2014, following two years where the CMO successfully increased aggregate enrollment by 0.4% and 4.3%. Fitch views this decline negatively, as it is a more volatile drop than seen in the last six academic years. However, the CMO has some track-record managing such volatility, which provides some comfort. The schools experienced an 8% enrollment decline in fall 2010, and the CMO managed the budget to generate TMADS coverage that year. Management reports continued focus on re-growing enrollment, and notes that most of the schools have physical capacity. Fitch views the Arizona charter school market as experiencing greater competition, even for ACSF's nine alternative high schools, than in prior years. The persisting enrollment issues are reflected in the 'BB' rating.

ACADEMIC PERFORMANCE

All Arizona schools, including charter schools, are transitioning to Common Core (CC) academic standards and testing in the 2014/2015 academic year. ACSF management reports that CC curriculum was introduced in the schools beginning last academic year. This academic transition means that existing state academic scoring may change. Fitch notes that nationally, the CC transition, and evaluation of related test results, is expected to take several years. For the 2013/2014 academic year, seven of the schools met the state's academic expectations, and three did not. The academic performance of the 10 schools varied widely; two received the highest 'A' designation, four received a 'B', and four received a 'C'. During the 2012/2013 academic year, all ten schools met the state's academic expectations. The CMO reports that academic resources have been added to ACSF schools as needed. Given the timing of ACSF charter renewals, and the importance of academic performance in that process, Fitch notes the importance of management's academic actions.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Charter School Rating Criteria' (Sept. 19, 2012);

--'Revenue-Supported Rating Criteria (June, 2013);

-- Fitch Affirms American Charter Schools Foundation (MI) at 'BB' (Feb. 3, 2014).

Applicable Criteria and Related Research:

Charter School Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688957

Revenue-Supported Rating Criteria - Effective June 12, 2012 to June 3, 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978861

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