Charter school revenue bonds issued for northern California-based Summit Public Schools were downgraded three notches to Ba3 from Baa3 by Moody’s Investors Service and their outlook was revised to negative from stable.

The rating change affected $22.6 million in charter school revenue bonds sold by the Redwood City-based charter school system.

“The downgrade to Ba3 reflects the material, unexpected operating deficits at the Summit Public Schools Home Office and closure of the Summit Denali middle and high schools,” Moody’s analysts wrote March 13. “Liquidity could face further weakening without significant adjustments to Home Office operations.”

The charter operator sold $28.6 million of revenue bonds through the California School Finance Authority, a conduit issuer arm of the State Treasurer’s Office, according to a CSFA document.

The Summit school board’s decision on March 2 to close Summit Denali, a Sunnyvale charter school with more than 600 middle and high school students, after the semester ends in June, negatively impacted Moody’s view of management credibility and its track record, governance considerations and was a key driver of this rating action, analysts said.

Administrators had first announced in January the school would likely be closed at the end of the year because it faces a $4.5 million deficit.

A school spokesperson could not be reached for comment.

The negative outlook “reflects the significant uncertainty of the obligated group’s financial status given the material imbalance of the Home Office, the potential disposition of the Denali High School campus, and the board’s decision to close the Summit Denali middle and high school campuses,” analysts said.

Summit Public Schools operates ten charter schools serving grades 6-12, seven in the San Francisco Bay Area and three in Washington state, in Seattle and Tacoma.

Each of the schools pays a management fee to the Summit Public Schools Home Office equal to a percentage of projected state education apportionment revenues prior to the beginning of each school year.

Systemwide enrollment is approximately 4,000 students for fiscal 2023, while enrollment for the obligated group is roughly 800 students for fiscal 2023, according to Moody’s.

The Summit Public Schools Obligated Group, for which the Series 2017 bonds were issued, consists of the Summit Public Schools Home Office, along with the Summit Shasta high school in Daly City and Summit Denali.

Lease payments from obligated group members to the Community High School Foundation, a California nonprofit corporation, represent the source of repayment under the loan agreement, according to Moody’s.

Management has not provided any detailed plans beyond the school closure regarding its plan to remedy the material existing structural imbalance, according to Moody’s. The financial position of the Home Office is expected to deteriorate over the next one to two years due to a significant operational imbalance and a modest year over year system-wide enrollment decline, Moody’s analysts wrote.

“Management’s ability to right size operations at the Home Office while maintaining service levels, debt service coverage, and operating liquidity will be key considerations moving forward,” Moody’s analysts wrote.

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