Arlington Higher Education Finance Corp., Texas A.W. Brown Fellowship Charter School; Charter Schools

S&P Global Ratings lowered its underlying rating to 'BB' from 'BBB-' on Arlington Higher Education Finance Corp., Texas' series 2016 and series 2017 education revenue bonds, issued for A.W. Brown Fellowship Leadership Academy (A.W. Brown). The outlook is stable. The 'AAA' enhanced program rating reflects our view of A.W Brown's participation in the Texas Permanent School Fund (PSF) Bond Guarantee Program, which provides the security of a permanent fund of assets that A.W. Brown may tap if necessary to meet its debt service obligations on the series 2016 and 2017 bonds. (For more information on the Texas PSF, please see the article published June 8, 2018, on RatingsDirect.) The lowered underlying rating reflects a material weakening in A.W. Brown's credit

...associated with recent management, board, and staff turnover. In our opinion, there is operational risk associated with the breadth of the changes. We assessed A.W. Brown's financial profile as vulnerable, with negative operating performance and a covenant violation seen in fiscal 2017 and projected for fiscal 2018, very weak maximum annual debt service (MADS) coverage, but a sufficient unrestricted liquidity position for the rating level. Combined, these credit factors lead to an indicative stand-alone credit profile of '##' and a final rating of '##.' The rating further reflects our view of: + A.W. Brown's volatile operating trends, with a large deficit on a full-accrual basis in fiscal 2017, a smaller deficit projected for fiscal 2018, and a healthier surplus budgeted for fiscal 2019, though we are unsure if the school will meet this expected level; + A.W. Brown's covenant violation resulting from the very weak MADS coverage of 0.55x in fiscal 2017, though slightly higher coverage is...

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