NEW YORK--()--Fitch Ratings downgrades and removes from Rating Watch Negative approximately $7.3 million of revenue bonds for the Erie County Industrial Development Agency to 'BBB-' from 'BBB'. The bonds are issued on behalf of Enterprise Charter School (ECS) in Buffalo.
The Rating Outlook is Negative.
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
ACADEMICS HINGE CHARTER RENEWAL: The downgrade reflects ECS' inability to achieve specified academic charter benchmarks for the term of their existence. Charter renewal standards weigh heavily on academic performance. The Negative Outlook reflects Fitch's concern that the school may be challenged to produce discernible, annual improvement in student test scores in its effort to achieve charter compliance.
FINANCIAL METRICS ANCHOR SCHOOL: Stable enrollment, consistently positive operating margins and relatively strong liquidity levels compared to peers are the key credit strengths.
MANAGEABLE DEBT BURDEN: Maximum annual debt service (MADS) comprises 10.1% of fiscal 2012 operating revenues; debt manageability is further evidenced by MADS coverage of 2.5 times (x) from operations.
GOVERNANCE AND ACADEMIC IMPROVEMENT: The inability of ECS' governing body to leverage instructional and financial resources and improve academic performance so that ECS achieves compliance with charter requirements. This will likely result in continued negative rating pressure.
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 STABLE, ACADEMICS REQUIRE IMPROVEMENT
ECS continues to benefit from strong demand, with full enrollment of 405 students and a wait list of 363 potential candidates for school year 2012-2013. However, academic development within ECS has not reached the levels proscribed by the charter since inception of the school. Fitch notes that ECS' limited ability to reverse course was partially due to the interim absence of a qualified chief academic officer in years 2010-2011. The hiring of a new principal and CAO in fall of 2011 has resulted in improvements for the current school year.
Buffalo Public Schools (BPS), the authorizer for ECS, notes the academic deficiencies of the school compared to charter expectations since inception. That said, BPS chose to renew the school's charter for a three-year period, expecting improvement in student performance during that time. Per renewal standards articulated by the New York State Education Department, the shorter renewal term of three years, down from the normal five year renewal is designed to allow the school to improve its performance. Lack of improvement by the end of the term may result in non-renewal of the charter.
ECS supports a student population within the City of Buffalo (rated 'A+' with a Stable Outlook by Fitch) with weaker socioeconomic indicators; poverty rates double the statewide average and high unemployment. Fitch believes that demand will remain strong as ECS serves a relatively greater percentage of higher need students both economically and academically than its peers. While lackluster academic performance could pressure the school's renewal chances, Fitch expects ECS to be able to achieve improvements in annual performance. A failure to post discernible incremental improvement within the year may pressure ratings.
POSITIVE FINANCIAL OPERATING CHARACTERISTICS
ECS' relatively strong and stable financial characteristics partially balance academic concerns. Consistently positive operations characterize ECS' favorable standing among the general complement of charter schools. ECS' average operating margin of 8.3% over the past six years reflects the relative maturity of the school and prudent financial management through shifts in state funding. New York State (rated 'AA' by Fitch) per pupil funding has been frozen at the 2011 level of $12,005 per student.
Fitch notes the 15.1% increase in state funding in 2011 from previously lower levels ($10,429 in 2010) as a contributor to ECS' favorable operations in fiscal 2011 and 2012. Additionally, as a result of the bond financing in fiscal 2011, ECS' facilities financing effectively replaced higher leasing costs with lower annual debt service requirements. Fitch believes the stability of ECS' primary revenue stream coupled with lower facilities costs should support stable operations over the long term.
ADEQUATE LIQUIDITY, MANAGEABLE DEBT
Liquidity, measured by available funds, or cash and investments not permanently restricted, totaled an adequate $2.9 million covering fiscal 2012 operating expenses ($5.2 million) and long term debt ($7.3 million) by 55.8% and 40.4%, respectively. Both metrics compare very favorably to other charter schools rated by Fitch. ECS has limited capital needs and total outstanding debt of $7.3 million generates MADS equaling $616,000 that accounts for a moderately high but manageable debt burden consuming 10.1% of fiscal 2012 operating revenues.
CHARTERS REQUIRE ACTIVE MANAGEMENT
ECS is primarily managed by a chief executive officer, a third party financial consultant and the CAO. Fitch notes that this small but effective team requires active engagement by the school's board of trustees (the board). This includes timely and systematic assessment of management performance against clear and specified goals. Noting lapses in the aforementioned practices in BPS' renewal recommendation, Fitch expects increased board involvement to raise ECS' academic and overall effectiveness.
ECS initiated operations in 2003 in the City of Buffalo, NY. ECS provides education to 405 students in grades K-8. At inception ECS was the only charter school authorized by a local school district (BPS) in the state and has been renewed on a long term basis twice since initial authorization. The current charter renewal, due in June 2013 is awaiting ratification of the authorizers' recommendation to the state education department.
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. 29, 2012).
Applicable Criteria and Related Research
Charter School Rating Criteria
Revenue-Supported Rating Criteria