|[February 12, 2014]
Fitch Revises the Rating Watch Negative to Positive on Enterprise Charter School's (NY) 'B' Ratings
NEW YORK --(Business Wire)--
Fitch Ratings maintains the 'B' rating and revises the Rating Watch
Negative to Positive Watch on approximately $7.3 million of series 2011
revenue bonds issued by the Erie County Industrial Development Agency on
behalf of Enterprise Charter School (ECS) located in Buffalo, NY.
The bonds are secured by a pledge of revenues of ECS, a first mortgage
lien on the facilities of ECS, assignments of rents and leases
receivable and a cash funded debt service reserve fund.
KEY RATING DRIVERS
RATING WATCH POSITIVE: ECS' charter authorizer, Buffalo Public Schools
(BPS) has recommended a charter renewal for ECS for 2014, although there
is no guarantee of a specific term or final ratification by the State
Education Department (SED). However, Fitch notes that the authorizer
worked within SED guidelines and coordinated with the department to
articulate the expectations of the school. The Rating Watch Positive
reflects anticipation of a formal approval from the state.
CHARTER UNCERTAINTY CONSTRAINS RATING: The 'B' rating reflects the
academic performance driven charter term reduction in 2013 and the
continued stress of operating under a severely abbreviated charter term.
Favorable resolution of the charter renewal in the coming months could
positively influence the rating.
FUTURE HINGES ON (News - Alert) ACADEMICS: New York State charter renewal standards
weigh heavily on academic performance and ECS will be required to
produce discernible, annual improvement in student test scores to
stabilize its performance and ensure charter compliance.
FINANCIAL METRICS SUPPORT SCHOOL: ECS' full and stable enrollment,
robust waitlists, consistently positive operating margins and relatively
strong liquidity levels compare favorably to investment grade peers and
remain key credit strengths.
MANAGEABLE DEBT BURDEN: Maximum annual debt service (MADS) comprises a
relatively high 10.3% of fiscal 2013 operating revenues but is covered
2.3x by net income available for DS. ECS' long term debt constitutes 5x
fiscal 2013 net income available for DS comparing relatively well to
investment grade peers.
RATING WATCH CONSIDERATIONS: A confirmation of a renewal term of no less
than three years could stabilize the rating.
CHARTER SCHOOL SECTOR RISKS: 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
that, if pressured, could negatively impact the rating over time.
CHARTER RENEWAL EXPECTATIONS IMPROVE
Fitch's previous rating downgrade to 'B' reflected ECS operation under a
one year charter as of June 2013 and the uncertainty associated with a
likelihood of a non-renewal in June 2014. During the November 2013
review of ECS Fitch was unable to receive confirmation from the charter
authorizer as to their expected recommendation for renewal. Duing that
time BPS was in the last stages of an extended and detailed review that
included seven school visits and observations between the period of June
and December 2013.
Subsequent to the last review, BPS submitted a renewal recommendation
for the charter. While the recommendation is not yet ratified by the SED
and the term is unspecified, it is probable that a three year term is
likely, due to ECS' previous status as needing academic improvement
(obviating a full five year renewal) and the understanding that less
than a three year renewal is too abbreviated a time frame to discern
development in a school's overall academic achievement.
RATING WATCH POSITIVE
In the March 2013 rating action, Fitch downgraded ECS to 'BBB-', noting
the possibility of the charter renewal term to be three years based on
BPS anticipated recommendation and need for academic improvement.
Subsequently, ECS was downgraded further to 'BB' reflecting the receipt
of a one year charter despite initial indications of a longer term. This
dissonance between the authorizer and the SED seems to have been
resolved. In November 2013, ECS was further downgraded to 'B' reflecting
the one year charter term and lack of information relating to a
subsequent renewal which increased the likelihood of an impending
closure in June of 2014. According to BPS, the current charter renewal
process incorporated all of SED guidelines and close coordination with
the office to ensure that BPS recommendation and the final approval of
the SED would concur. Fitch expects confirmation of the charter renewal
later this spring.
ENROLLMENT AND FINANCIAL PERFORMANCE STABLE
ECS' fall enrollment is at capacity with approximately 405 students for
its K-8 classes. Fiscal 2013 results indicate a positive operating
margin of 9.3% and growth in liquidity of about $850,000. Available
funds for ECS total $3.86 million, comprising 71.5% of operating
expenditures and 53.6% of long term debt. Pro forma MADS of $616k is
covered 2.3x with net income available for DS with the MADS burden
remaining high but manageable at 10.3% of unrestricted operating
revenue. These ratios rank among the strongest among Fitch's charter
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
-- 'Charter School Rating Criteria' (Sept. 2012);
-- 'Revenue-Supported Rating Criteria' (May 2013);
-- 'Fitch Downgrades Enterprise Charter School (NY) to 'B', Maintains
Rating Watch Negative' (Nov 2013).
Applicable Criteria and Related Research:
Charter School Rating Criteria
Revenue-Supported Rating Criteria
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