|[May 06, 2014]
Fitch Affirms Enterprise Charter School (NY) Revs at 'B'; Outlook Positive
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed the 'B' rating 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, or the
Fitch has removed the ratings from Rating Watch Positive and assigns the
bonds a Positive Outlook.
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
CHARTER RENEWAL APPROVED: The Positive Outlook reflects ECS' two-year
charter renewal effective July 1, 2014, which was recommended by the
Buffalo Board of Education (the school's authorizer) and ratified by the
New York State Education Department's (SED) Board of Regents in March
2014. This two-year renewal remains limited compared to the maximum
renewal period of five years in New York State.
LIMITED CHARTER TERM CONSTRAINS RATING: The 'B' rating continues to
reflect the academic performance-driven charter renewal period of two
years commencing in July 2014, following a one-year renewal term granted
in July 2013, coupled with the continued stress of operating under a
still abbreviated charter term.
FUTURE HINGES ON (News - Alert) ACADEMICS: New York State charter renewal standards are
weighted heavily toward academic performance and ECS will be required to
produce annual improvement in student test scores over the next two
years to remain in compliance with its charter and ensure further
renewal in June 2016. This includes achievement of certain annual
academic growth targets that are yet to be determined.
STABLE FINANCIAL METRICS: ECS' full and stable enrollment has driven its
recent track record of operating surpluses, relatively sound liquidity
levels, and solid debt service coverage from operations.
MANAGEABLE DEBT BURDEN: Maximum annual debt service (MADS) comprised a
high 10.3% of fiscal 2013 operating revenues but was covered a solid
2.3x by net income available for debt service. ECS' long-term debt
constituted 5x fiscal 2013 net income available for debt service, which
compares favorably to most other charter schools rated by Fitch.
ACADEMIC PERFORMANCE: ECS' ability to improve student academic
performance over the next two academic years could yield upward rating
movement. Conversely, an inability to improve academic performance will
hinder renewal of its charter in June 2016 and would result in negative
STANDARD SECTOR CONCERNS: A limited financial cushion; substantial
reliance on enrollment-driven, per-pupil funding; and charter renewal
risk are credit concerns common among all charter schools that, if
pressured, could negatively impact the rating.
Enterprise Charter School opened in 2003 in the city of Buffalo, NY. It
serves approximately 405 students in grades K-8, with about 221 students
presently wait-listed. ECS is authorized by Buffalo Public Schools (BPS
and has had its charter renewed four times to date. Its current charter
expires on June 30, 2016.
CHARTER RENEWAL APPROVED
Fitch downgraded ECS to 'B' in November 2013 after it received a
significantly abbreviated one-year charter renewal. The renewal term was
primarily based on the authorizer's concern over student academic
performance relative to district schools and state standards. Following
a review by BPS, where BPS initially recommended a three-year renewal,
Fitch placed the rating on Positive Watch in February 2014 based on the
likelihood that the SED would ratify the three-year renewal
BPS' renewal recommendation was based on various measures taken by ECS
to improve student academic performance, including a management
restructuring expected to provide more support for student success. It
was also determined that one year is not enough time to demonstrate
measurable improvement and a two-year renewal would allow more time for
improvement to materialize. As anticipated, SED ratified the renewal in
March 2014, but ECS received only a two-year renewal (its fourth
overall), effective July 2014 through June 2016. The two-year term is
still significantly shorter than is typical for the sector (particularly
for an established school such as ECS) but is improved from the one-year
renewal ECS received in 2013. Fitch believes the limited renewal term
precludes further rating lift.
BPS and ECS are currently discussing revising the benchmarks used to
measure student academic growth that will now measure ECS against
schools serving a similar demographic rather than against schools
statewide. Future renewals will hinge on academic growth, with academic
year 2012-2013 serving as the base year. ECS will begin its next renewal
application process around August 2015. The authorizer's three main
areas of focus for charter renewals are governance, financials and
academics. It advised there are no issues with the first two, but as
mentioned above, the school remains in need of academic improvement.
BPS' next renewal recommendation is expected to come in early 2016.
STABLE ENROLLMENT AND FINANCIAL PROFILE
Enrollment for the 2013-2014 academic year remains at capacity with
approximately 405 students enrolled in grades K-8 and a robust waiting
list. The school's financial profile remained stable in fiscal 2013,
with a positive operating margin, modest balance sheet cushion, and
solid debt service coverage from net operating income. Financial
performance is tempered by a high debt burden and revenue concentration
in per-student funding - characteristics common among most charter
schools. Dec. 31, 2013 unaudited interim financials were ahead of
budget, with a $367,000 operating deficit based on revenues of $2.37
million (similar to the prior year period) compared to a budgeted
deficit of $458,000.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2013);
--'Charter School Rating Criteria' (Sept. 2012);
--'Fitch Revises the Rating Watch Negative to Positive on Enterprise
Charter School's (NY) 'B' Ratings' (Feb. 2014).
Applicable Criteria and Related Research:
Charter School Rating Criteria
Revenue-Supported Rating Criteria
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