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Fitch Affirms Enterprise Charter School (NY) Revs at 'B'; Outlook PositiveNEW 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 school). Fitch has removed the ratings from Rating Watch Positive and assigns the bonds a Positive Outlook. 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 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. RATING SENSITIVITIES 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 rating action. 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. CREDIT PROFILE 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 recommendation. 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 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 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. |
