[February 12, 2014]

Fitch Revises the Rating Watch Negative to Positive on Enterprise Charter School's (NY) 'B' Ratings

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.

SECURITY

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 SENSITIVITIES

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.

CREDIT PROFILE:

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 school ratings.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688957

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820441

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