Rating Action: Moody's downgrades Union Colony Schools, CO revenue rating to Ba2; outlook revised to negativeGlobal Credit Research - 01 Sep 2022New York, September 01, 2022 -- Moody's Investors Service has downgraded the Charter School Revenue Bonds (Union Colony School Project), Series 2018 of Union Colony Schools, CO to Ba2 from Baa3. The school has approximately $18 million in revenue bonds outstanding. The outlook was revised to negative from stable.RATINGS RATIONALEThe downgrade to Ba2 from Baa3 reflects the school's continued trend of enrollment decline which included a sharp drop in 2021, a key social consideration, resulting in weak financial performance and debt service coverage that unexpectedly fell below sum-sufficient in fiscal 2021. Debt service coverage is projected to remain below the coverage requirement in fiscal 2022, exclusive of non-operating revenue, and is budgeted to narrowly meet the minimum covenant coverage requirement in fiscal 2023. The school is also hampered by outsized leverage inclusive of outstanding revenue bonds and unfunded pension liabilities.Governance is also a key driver of the downgrade as below sum-sufficient coverage triggers several remedial steps as outlined in the covenants, which have not occurred. Acceleration is a default remedy available to bondholders as outlined in the Indenture. The school's liquidity, while satisfactory relative to its operations, is insufficient to repay the outstanding debt in the event of an acceleration. Furthermore, payments under the lease, as well as any potential draw on the Colorado Charter School Debt Reserve Fund Program (CDRSF) are both subject to appropriation by the respective entities. There is nothing in the state's Moral Obligation Program that requires the state pay off the bonds if they are accelerated.The rating is supported by the maintenance of satisfactory operating liquidity, a trend of increasing state per pupil revenue, and the school's long charter contract which expires in 2031.RATING OUTLOOKThe negative outlook reflects the expectation for continued operating pressure over the next couple of years as the school contends with declining enrollment. Inability to balance operations and meet covenant requirements will result in downward rating action.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING- Material and sustained trend of enrollment growth- Significant strengthening of debt service coverage and operating liquidity- Moderation of the school's leverage profileFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING- Continued trend of trend of enrollment loss- Material erosion of operating liquidity or coverage below bond covenant requirementsLEGAL SECURITYUnion Colony's Series 2018 bonds were issued by the Colorado Educational and Cultural Facilities Authority with proceeds loaned to Union Colony Schools Building Corporation. Under the loan agreement, the Building Corporation will make debt service payments from pledged revenue, which consist of lease payments from Union Colony Schools.The structure benefits from the state's intercept mechanism, under which the State Treasurer, on a monthly basis, will pay debt service based upon 1/6 principal and 1/12 interest amounts, directly to the Trustee from first available state aid payments owed to Union Colony. The intercept provides protection against liquidity issues or administrative error at the school level, but it does not protect against a shortfall in per pupil revenue stemming from a decline in enrollment or the termination of the school's charter. In the event of default, the bonds are additionally secured by a deed of trust on the Building Corporation's property.Bond covenants include a 45 days cash on hand requirement and annual debt service coverage ratio of 1.2 times, unless the school's days cash on hand are at least 75 days, then the debt service coverage is 1.1 times. In the event the liquidity or coverage covenants are not met, the school must retain a management consultant. The school is required to retain the management consultant until it has achieved a coverage ratio equal to the required level for two consecutive fiscal years. The debt service reserve was funded at MADS. USE OF PROCEEDS Not applicable. PROFILE Union Colony Schools, authorized by Weld County School District 6, opened its doors in 1997 serving grades 8-12. It has since expanded and currently serves grades K-12 across two different facilities in Greeley and Evans, CO. The current academic year enrollment is 704 students.METHODOLOGYThe principal methodology used in this rating was US Charter Schools published in September 2016 and available at https://ratings.moodys.com/api/rmc-documents/64397. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.At least one ESG consideration was material to the credit rating action (s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Kenneth Surgenor Lead Analyst REGIONAL_SOUTHWEST Moody's Investors Service, Inc. 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