(The following statement was released by the rating agency)NEW YORK, March 07 (Fitch) Fitch Ratings has affirmed the 'BB+' rating on approximately $67 million of Florida Development Finance Corporation revenue bonds, series 2010 A/B issued on behalf of Renaissance Charter School, Inc. (RCS).The Rating Outlook is Stable.SECURITYThe bonds are jointly secured by lease payments made from the unrestricted revenues of six Florida charter schools (the financed schools); a cash-funded debt service reserve fund; a partial debt service guarantee from Charter Schools USA (CSUSA) for one school (Duval Charter School at Arlington); and mortgage liens (first liens on four of the financed facilities and a leasehold interest in a fifth).Bondholders benefit from structural aspects of the transaction, including subordination of operating expenses along with CSUSA's management fees; and unrestricted revenues of the financed schools flowing monthly from RCS to the trustee, with initial allocations to debt service. Annual bond covenants include liquidity tests and a 1.1x debt service coverage covenant (adjusted for management fees).KEY RATING DRIVERSLIMITED HISTORY; IMPROVING COVERAGE: In fiscal 2013, excluding the two newest schools, the remaining bond schools covered transaction maximum annual debt service (TMADS) by 1.28x; this adjusted coverage was not achieved in fiscal 2012. Fitch charter school criteria excludes from its debt service coverage calculations schools with less than five years of audited financials and no charter renewal history. The series 2010 pooled transaction continues to have speculative grade characteristics, largely due to the limited operating histories of some of the pledged schools; slim operating margins; weak balance sheet liquidity; and a high debt burden.OPERATING STABILITY:  Each of the financed schools either grew enrollment modestly or remained at capacity in fall 2013, though two schools (representing 42% of the pool's fall 2013 enrollment) remain below original projections. Individually, each school achieved at least 1.0x debt service coverage in fiscal 2013, although one school achieved this only with expense adjustments for the management fee. Operations as a whole benefitted from an approximate 2% increase in state per pupil education funding in fiscal 2013. Fitch anticipates similar or slightly stronger financial performance in fiscal 2014 due to another modest increase in state per pupil funding.EXPERIENCED MANAGEMENT:  The financed schools benefit from the management oversight and successful track record of CSUSA, which serves as their education management organization (EMO). CSUSA's various EMO contracts are not coterminous with final bond maturity (2041). Fitch notes that the bond schools have virtually no management capability absent CSUSA. Fitch anticipates regular charter renewals given the schools' high reliance on CSUSA and its role in starting up the schools.RATING SENSITIVITIESSUCCESSFUL MATURATION OF NEW SCHOOLS: If enrollment growth continues, financial performance improves as projected, and all the financed schools receive timely charter renewals (which assume solid academic performance), upward rating momentum is possible.STANDARD SECTOR CONCERNS: A limited financial cushion, substantial reliance on enrollment-driven per-pupil funding, and charter renewal risk are credit concerns common in all charter school transactions which, if pressured, could negatively impact the rating.CREDIT PROFILEThe financed schools are (1) Renaissance Elementary Charter School; (2) Renaissance Charter School of St. Lucie; (3) Duval Charter School at Arlington; (4) North Broward Academy of Excellence and (5) North Broward Academy of Excellence Middle School (both North Broward schools are located on the same campus); and (6) the Keys Gate Dorm Facility with students from Keys Gate K-8 Charter School.STABLE OPERATIONSThe financed schools' fiscal 2014 budget assumed consolidated enrollment of 4,687 and break-even operations for each entity. The October 2013 enrollment count stood at 4,557 students; short of the initial base case projection of 4,868. As in fiscal 2013, Renaissance Charter School of St. Lucie (RCSL) and Duval Charter School of Arlington (DCSA) remain short of their original targets. CSUSA has adjusted these schools' expenses accordingly and the shortfalls have not significantly affected RCS' overall financial performance. Consolidated operating margins for the financed schools are typically break-even or modestly positive.  Margins for fiscal 2013 were essentially breakeven; when adjusted for 100% of CSUSA's management fee (which is subordinate to debt service), margins increased to 9%. For fiscal 2014, CSUSA reports a 2.5% increases in per pupil aid, following a 2% increase in fiscal 2013 and a 9.7% cut in fiscal 2012. The schools' budgets forecast break-even operations in fiscal 2014, and Fitch views this forecast as achievable based on the increased state aid and balanced six-month interim results.  ADEQUATE DEBT SERVICE COVERAGETwo of the financed schools (RCSL and DCSA) are relatively new.  RCSL was established in 2010 with an initial charter through June 2014, and DCSA was established in 2011 with an initial charter through June, 2015. When these two schools are excluded from Fitch's assessment of TMADS coverage, Fitch calculates RCS' fiscal 2013 net income available for debt service equal to about 1.28x of TMADS ($5.05 million).For fiscal 2013, including all bond schools, net available income covered TMADS by a similar 1.3x, and generated a slightly positive 0.2% operating margin.  That compares to 1.2x coverage in fiscal 2012 (a year that also recorded a modestly negative GAAP margin of negative 0.3%). Fiscal 2013 was the third consecutive year when consolidated net available income of all financed schools met or exceeded 1x TMADS.LIMITED FINANCIAL CUSHION RCS' available funds (defined as unrestricted cash and investments) totaled $6.2 million as of June 30, 2013, equal to a slim 19.7% of consolidated operating expenses and 9.3% of outstanding debt (approximately $67 million). This compares to available funds of $5.2 million as of June 30, 2012, or 16.5% of consolidated operating expenses and 7.7% of debt. Fitch recognizes the nominal growth in available funds; however, these liquidity metrics remain low. Fitch expects continued modest but gradual improvement over time.CONTRACTS REMAIN STABLECharters for the bond schools expire between 2015 and 2026. RCS and CSUSA report that they have never had a renewal application rejected. Fitch expects regular charter renewals through final maturity of the series 2010 bonds. CSUSA's management contracts for the financed schools expire beginning in 2015, with automatic five-year renewals thereafter. Per Fitch's criteria, contact is also to be made with the schools' charter authorizers. However, Fitch had limited direct authorizer contact during this review cycle.Academic performance will likely be a key factor in both charter and management contract renewals. For the 2012/2013 academic year, three of the financed schools received at least an 'A' or 'B' from the State Department of Education, which the state considers high-performing. Two other schools received 'C' scores, and one (DCSA) received a 'D' score (it had a 'C' score the two prior academic years). These results are weaker than the 2011/2012 academic year, when all but one of the financed schools received at least an 'A' or 'B'. Management partly attributed this to the challenging student demographic this school serves and noted that it continues to address the issue. Fitch will monitor CSUSA's ability to restore operating stability at DCSA, but expects no significant challenges at this time based on CSUSA's broad experience in managing charter schools.Contact:Primary AnalystColin WalshDirector+1 212-908-0767Fitch Ratings, Inc.One State Street PlazaNew York, NY 10004 Secondary AnalystSusan Carlson Director+1 312-368-2092Committee ChairpersonDennis PidhernyManaging Director+1 212-908-0738Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com.Applicable Criteria and Related Research:--'Charter School Rating Criteria' (Sept. 19, 2012);--'Fitch Downgrades Renaissance Charter Schools' (FL) 2010 Revs to 'BB+' (March 8, 2013).Applicable Criteria and Related Research: Charter School Rating Criteria
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