Fitch Affirms Chester Community Charter School's (PA) Revs at 'BB'; Outlook Positive

NEW YORK--()--Fitch Ratings affirms the long-term rating at 'BB' and removes from Rating Watch Negative, approximately $56 million in charter school revenue bonds issued by the Delaware County Industrial Development Authority, PA (DCIDA). The bonds are issued on behalf of Chester Community Charter School (CCCS).

The Rating Outlook is Positive.

SECURITY

The bonds are secured by pledged revenues of CCCS, backed by a mortgage on the property and facilities leased by the school and a debt service reserve (DSR) cash-funded to transaction maximum annual debt service (TMADS) of $4.1 million due in 2013. Management fee payments to CSMI, LLC (CSMI) are subordinated to the payment of debt service and the maintenance of a fully funded DSR.

KEY RATING DRIVERS

RATING WATCH REMOVED: The decision to remove the Rating Watch is supported by the authorizer's null assessment of a Commonwealth of Pennsylvania Auditor General performance audit for CCCS, which eliminates or greatly reduces Fitch's concern of negative impact to the school.

IMPROVED FINANCIAL PERFORMANCE: The Positive Outlook reflects the resolution of litigation against the Chester Upland School District (CUSD), and receipt of nearly $18 million in installment payments in fiscal year 2013 (FY13). These funds, previously due to the school, enabled operations to improve from a -20% margin in FY12 to a 5.4% margin in FY13. Additionally, CCCS's relationship with CUSD, who acts as the charter authorizer, has substantially improved.

DIMINISHED LIQUIDITY PROFILE: CCCS's balance sheet resources have continued to decline and the school's available funds, a measure of unrestricted liquidity is subject to further reduction as lease payments related to the new Upland Borough campus are initiated in the current fiscal year.

ENROLLMENT STRENGTH & COMMUNITY NEED: Enrollment has grown year over year and December 2013's headcount of 3,039, while level with 2012's average headcount of 3,040, still represents over 50% of the students in the school district. CCCS can accommodate 3,500 students but expects to be at full capacity with 3,350 students.

STRONG BONDHOLDER PROTECTIONS: Legal and structural provisions include a trustee intercept of state aid that provides for payment of debt service before any distribution of revenues to CCCS, and contractual subordination of CSMI's fee.

RATING SENSITIVITIES

IMPROVED FINANCIAL FLEXIBILITY: CCCS's ability to maintain consistently break-even to positive operations and grow liquidity levels while successfully integrating the operations of the third campus in Upland Borough could likely provide upward rating pressure.

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 school transactions that, if pressured, could negatively impact the rating over time.

CREDIT PROFILE

CCCS was formed in 1998 to provide an alternative public school option for residents in CUSD, which serves the City of Chester, PA, Chester Township, PA and the Borough of Upland, PA. CCCS has experienced consistent, significant, demand-driven growth, leading the school to expand its academic offerings to grades K-8 on three campuses. CCCS has a very strong relationship with CSMI, which was formed specifically to manage the school's operations. CSMI's management strategy has been fiscally conservative, resulting in historically balanced operations and strong academic performance compared to CUSD.

Enrollment at CCCS, 3,175 students at the beginning of the school year, has remained stable over the course of its history. CCCS also undertook a community-initiated project to open a campus in Upland Borough in fall 2013. CCCS's ability to meet its enrollment goal for the new campus would ease credit concerns related to future planned expansion.

FISCAL 2013 OPERATING IMPROVEMENT

CCCS generated a 5.4% margin in FY13, assisted by the receipt of owed funds, which reversed a -20% margin in FY12 (due to the aforementioned hurdles). For fiscal 2014 the school expects break-even to positive operating results and interim statements, as of Dec. 31, 2013 indicate negligible but positive cash based margins. Completing the fiscal year with a positive margin would continue a favorable trend for the school and provide positive rating pressure over time.

CCCS faced material funding challenges during fiscal 2012 due to per pupil funding being withheld or delayed at the CUSD level. CCCS subsequently received those funds after a court settlement in fiscal 2013. The eventual settlement agreement, completed in July of 2012 resulted in the receipt of installment payments in the amount of $17.5 million. These funds were utilized to pay off loans incurred to cover expenses in the absence of regular funding.

WEAK BALANCE SHEET CUSHION

Operational difficulties constrained CCCS's balance sheet cushion. Available funds (defined by Fitch as cash and investments not permanently restricted) dropped to $2.2 million in FY13. These funds represented 5.1% of fiscal 2013 operating expenses and 3.9% of total outstanding debt. CCCS's balance sheet resources are very weak relative to the debt incurred and Fitch expects these metrics to exhibit only incremental growth over time.

DEBT MANAGEABILITY

CCCS has historically exhibited a high but manageable debt burden. TMADS represented 10.4% of fiscal 2013 revenues, somewhat lower than the five-year average of 11.9%. Coverage of the annual debt service averaged 0.9x from fiscal 2009 to 2013; fiscal 2013 actual coverage was 1.5x. Average coverage excluding fiscal 2012 averaged a stronger 1.4x.

CCCS's operations have historically provided adequate net available income and can cover triple net lease costs associated with campus facilities without additional enrollment or revenue growth. Coverage for transaction MADS of $4.69 million, including lease costs for the new Upland Borough campus, slimmed to 1.2x. The debt burden increased modestly to 10.4% of fiscal 2013 revenues. Fitch views school's ability to cover the facilities expenses in the absence of any enrollment growth favorably.

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 Places Chester Community Charter School PA's Revs On Rating Watch Negative' (Oct. 4, 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=825525

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Contacts

Fitch Ratings
Primary Analyst
James George, +1-212-908-0723
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Susan Carlson, +1-312-908-2092
Director
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
James George, +1-212-908-0723
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Susan Carlson, +1-312-908-2092
Director
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com