NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms its 'BB-' rating on 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 schools).
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.
The Rating Outlook is revised to Negative.
KEY RATING DRIVERS
NEGATIVE OUTLOOK: The Outlook reflects BCCMS fiscal 2013 operations which resulted in a negative margin due to rising operating expenses which were not offset by the growth in student enrollment. Further concerns include the ability of BCCMS to meet scheduled debt service through normal operating net income.
LIMITED OPERATING HISTORY: The rating reflects BCCMS' three-year operating history. The schools are in their fourth year of operations. Accompanying this limited operating history are weakened operating margins, and a very high debt burden. Notwithstanding the weaker resource base and operations, Fitch's analytical methodology constrains any charter with less than five years of operating history to a speculative grade rating.
DEMAND ON-TARGET: BCCMS enrolled 438 students in fall of 2013, close to full capacity of 444 students which was previously expected only in fall of 2014. Fitch expects fiscal 2014 operations to reflect the benefit of a fully enrolled complement of students.
WEAK LIQUIDITY AND HIGH DEBT BURDEN: Liquid resources held by BCCMS provide a very minimal cushion while the relatively small revenue base results in an extremely high pro-forma debt burden.
NO RENEWAL HISTORY: BCCMS is in the fourth year of operations on a five-year charter. Fitch expects the authorizer, The Charter School Institute (CSI) of the State University of New York (SUNY) to consider BCCMS' charter renewal as early as summer of 2014. However, with less than one charter renewal and limited operating history, BCCMS, as per Fitch criteria, is under the threshold for an investment grade rating.
IMPROVED ACADEMICS AND OPERATIONS: BCCMS' inability to balance fully-enrolled middle school operations and demonstrably improve academic performance as measured by the authorizer, could pose 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.
WEAK MARGINS AND HIGH DEBT BURDEN
The operating margin for audited fiscal 2013, audited was a very weak negative 28%, down from a positive 18% margin in fiscal 2012. This decline was the result of expensing the interest portion of debt service that BCCMS had capitalized at bond issuance. Fitch calculated the adjusted margin (accounting for capitalized interest) at an improved but still negative at 11.3%. As fiscal 2014 will be the first year with a nearly fully enrolled school at 438 students, Fitch expects operations to stabilize and BCCMS to have the ability to cover its $1.286 million debt service payment in calendar 2014.
BCCMS' MADS, including subordinate loan payments, totals $1.41 million in 2043 and constitutes a high 27.4% of 2013 revenues. Weakened 2013 operations generated income available for debt service (DS) of $953,000, covering MADS by just 0.68x. However, Fitch expects BCCMS' debt burden to decline as the schools operate at full capacity starting fiscal year 2014. The inability for the schools to generate DS coverage from regularly recurring net income could further constrain BCCMS' credit rating.
BCCMS is located in the city of Albany and is authorized by CSI. Initiating operations in fall 2010 with 92 students, BCCMS has grown as planned and had a combined enrollment of 438 students, as of fall 2013. Final enrollment at BCCMS was forecasted at 444 students within its first five years of operations; Fitch considers the schools fully enrolled for fiscal 2014. 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+, Stable Outlook' by Fitch). BCCMS is part of the Albany Charter Schools Network and is one of ten schools who have an agreement with the foundation. BCF charter schools serve over 3,000 children accounting for roughly 25% of all students within the city.
ACADEMIC PERFORMANCE COULD AFFECT RENEWAL
Fitch notes that academic performance as measured by the CSI was weaker than expected for both schools. Additionally, Fitch notes that charter renewal expectancy is highly correlated to meeting academic benchmarks consistently. The ability for the schools to achieve sufficient improvement and prevent a limitation to a full charter renewal is a real concern. Fitch expects to review the schools' academic scorecard in the 2014 review period and could take rating action at that time.
OBLIGOR AND GUARANTOR RESOURCES LIMITED
In fiscal 2013, BCCMS' available funds, or cash and investments not permanently restricted, grew to $366,000 from $134,000 registered the prior year. As a percentage of fiscal 2013 operating expenditures and pro-forma leverage, available funds comprised approximately 5.6% and 2.3%, respectively. These limited balance sheet resources are expected to be supported marginally by the foundation, represented by the guarantee of debt service on the bonds. However, foundation assets are limited and are not prohibited from supporting, as needed, other affiliated charter schools. Hence, Fitch does not include the potential BCF support as a rating factor.
BCF's fiscal 2012 available funds (defined as unrestricted cash and investments) totaled approximately $718 thousand, approximately 12% of fiscal 2012 expenditures and 1.7% of the foundation's outstanding debt (including mortgages). As the foundation continues to participate in New Market Tax Credit transactions, management expects a forgiveness of roughly $7.3 million in debt by June of 2017, including a transaction completed in December 2013 which netted $1.1 million in cash. These amounts which may be a combination of cash and non-cash revenue are expected to strengthen BCF's credit position incrementally over time.
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 mentioned earlier 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 or delay of education aid from the district to the trustee and have funds remitted directly from the state to the trustee.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Charter School Rating Criteria' (Sept. 19, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Fitch Downgrades Brighter Choice Charter Middle Schools (NY) to 'BB-' (March 8, 2013)
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Charter School Rating Criteria