NEW YORK--()--Fitch Ratings downgrades to 'BB-' from 'BB+' and removes from Rating Watch Negative approximately $15.1 million in project education revenue bonds (the bonds), series 2012 for the Industrial Development Authority of the City of Phoenix, Arizona. The bonds were issued on behalf of Brighter Choice Charter Middle School for Boys and Brighter Choice Charter Middle School for Girls (BCCMS).
The Rating Outlook is Stable.
Project education revenue bonds are a general obligation of BCCMS, with the Brighter Choice Foundation (BCF, the foundation) providing a guarantee for debt service. A custody agreement is in place that directs state of New York (general obligation bonds rated 'AA' by Fitch) educational aid funding received by Albany City School District (the district), to the bond trustee for the payment of debt service. Other security provisions include a debt service reserve funded to maximum annual debt service (MADS) on the bonds and a first mortgage lien on the campus.
KEY RATING DRIVERS
DOWNGRADE HIGHLIGHTS LIMITED HISTORY: BCCMS' rating downgrade reflects their limited operating history: less than five years of operations, accompanied by relatively weak financial measures including a very high debt burden and small resource base. This action is informed by Fitch's revised analytical methodology that denotes as low speculative grade any charter with less than five years of operating history.
WEAK LIQUIDITY AND HIGH DEBT BURDEN: Liquid resources held by BCCMS provide a very minimal cushion while the relatively small revenue base, in absence of enrollment growth, results in an extremely high pro-forma debt burden.
ENROLLMENT GROWTH REQUIRED: Although slightly below the initial target, the student count increased for the current year; stabilized operations for fall 2013 are expected to reflect full enrollment.
NO RENEWAL HISTORY: BCCMS are in the third year of operations on a five-year charter. Fitch's revised criteria highlights a minimum of one charter renewal for achieving an investment grade rating. Reflected in the current downgrade, this drawback is offset by BCF's track record of charter renewals for its affiliated schools.
SOLID MARKET POSITION: Counterbalancing the aforementioned factors are the middle schools' academic success, market dominance of BCF charter schools and the foundation's success in the city's charter school landscape.
UNREALIZED PROJECTIONS: Insufficient enrollment growth within the next school year and a growing need to rely on already light resource levels at BCF would pressure the rating.
SUSTAINED OPERATING SURPLUS: BCCMS' ability to post a consistently strong operating margin for the upcoming fiscal year end and maintain strong performance through the next fiscal cycle could improve 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.
ENROLLMENT GROWTH REQUIRED
Enrollment grew from 214 students to 327 students for 2012-2013, achieving the proposed growth for the year. Fitch expects that BCCMS will most likely achieve the forecasted full enrollment of 440 students by the beginning of the 2013-2014 school year. The need for enrollment growth in order to generate pro-forma debt service coverage from recurring operations is consistent with the speculative grade rating. However, Fitch favorably notes BCCMS' success in achieving forecasted enrollment targets and maintaining academic compliance with the state's annual yearly progress requirements.
BCCMS initiated operations in fall 2010 with 92 students and had a combined enrollment of 214 students in fall 2011. The middle schools are located directly across the street from the Brighter Choice Charter Boys Elementary School and the nearby Brighter Choice Charter Girls Elementary School (the elementary schools, revenue bonds rated 'BB+' by Fitch). Given the close proximity of the elementary schools to BCCMS and its overlapping management, it is expected that enrollment growth at BCCMS will be fostered by a natural progression of elementary school graduates to the schools. The academic success of elementary school students, coupled with robust waitlists at multiple grade levels, help to mitigate these concerns.
OBLIGOR, GUARANTOR RESOURCES LIMITED
Available funds, or cash and investments not permanently restricted, grew over fiscal 2012 but is still very light at $134,000. As a percentage of fiscal 2012 operating expenditures and pro-forma leverage, available funds comprised approximately 3.5% and 0.8%, respectively.
Limited balance sheet resources are expected to be supported marginally by BCF, represented principally by the guarantee of debt service on the bonds. However, Fitch notes that foundation assets are limited and any consistent support would adversely affect BCF's liquidity. BCF's resources are not prohibited from supporting, as needed, other affiliated charter schools.
BCF's fiscal 2011 available funds (fiscal 2012 data for a year end Dec. 31 is not yet available) totaled approximately $1.6 million, approximately 29.7% of fiscal 2011 expenditures and 2.7% of the foundation's outstanding debt (including mortgages). Bond proceeds from issuances in 2012 reimbursed BCF for previously expended funds. This inflow is expected to improve the foundation's liquidity position.
HIGH DEBT BURDEN
BCCMS' MADS, including subordinate loan payments, totals $1.41 million in 2043 and constitutes a high 27.3% of 2012 revenues. Fitch's revised criterion characterizes a debt burden higher than 15% as being a speculative grade credit attribute. Although BCCMS' MADS burden is extremely high, 2012 operations generated income available for debt service which covered MADS by 1.1x. Fitch expects BCCMS' debt burden to decline as the schools begin to operate at full capacity (440 students) in 2014 and generate sufficient MADS coverage from recurring operations. In the meantime, BCCMS' ability to achieve rapid enrollment growth will likely increase revenues earlier than expected to achieve sufficient DS coverage.
FAVORABLE DEBT PROVISIONS AND REGULATORY FRAMEWORK
Bondholder security is enhanced by various security provisions and the generally supportive operating environment for charter schools in the city of Albany (the city). Under the custody agreement, per pupil education aid funding, receivable from the state and paid to the district, is remitted directly by the district to the custodian/bond trustee for debt service and associated expenses.
Remaining education aid funding is then remitted to BCCMS to be used for general operating purposes. BCCMS can appeal to the state in case of non payment of education aid from the district to the trustee. In this case, funds are remitted directly from the state to the trustee. Shortfalls in DS coverage are mitigated by the school's reliance on BCF's available, albeit limited, resource base through bond maturity.
BCCMS operations commenced in fall of 2010, increasing the BCF network to eleven schools; BCF charter schools are the only active charter schools in the city. As of fall 2012 the BCF network served almost 3,000 children accounting for roughly 25% of all students within the city. The elementary schools, BCF's first schools in the city, opened in 2002.
Fitch's actions are part of its completed industry-wide review, which commenced September of last year when Fitch placed all of its rated charter schools on Rating Watch Negative. Fitch will release an overview of its rating actions in a separate press release later today.
Additional information is available at 'www.Fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Charter School Rating Criteria' (Sept. 19, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Fitch Places all Charter School Bonds on Rating Watch Negative' (Sept. 19, 2012).
Applicable Criteria and Related Research
Charter School Rating Criteria
Revenue-Supported Rating Criteria