NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'B' rating on approximately $7.1 million of series 2011A revenue bonds issued by the Erie County Industrial Development Agency on behalf of Enterprise Charter School (ECS, or the school).
The Rating Outlook remains Positive.
The bonds are secured by a pledge of the gross revenues of ECS, a first mortgage lien on the school's facilities, assignments of rents and leases receivable, and a cash-funded debt service reserve fund sized to maximum annual debt service (MADS).
KEY RATING DRIVERS
ABBREVIATED CHARTER TERM: The 'B' rating reflects ECS' limited two-year charter renewal that was effective July 2014, which followed a one-year renewal in July 2013. These very limited renewal periods, driven by historically poor academic performance, compare to the maximum renewal period of five years in New York State, and currently constrain the rating.
ACADEMIC IMPROVEMENT SUSTAINED: The Positive Outlook reflects improved academic performance at ECS over the past year, with students demonstrating measurable progress in math and English language arts (ELA) testing. New York State charter renewal standards are weighted heavily toward academic performance, so sustained academic improvement should serve to benefit the school as it nears its next charter renewal in June 2016.
HEALTHY FINANCIAL PROFILE: ECS' consistently full and stable enrollment has driven its track record of operating surpluses (albeit based on a small revenue base), relatively sound liquidity levels, and solid debt service coverage from current operations. Further benefiting the school's financial performance is improved state per pupil funding which increased slightly in fiscal 2015, with another modest increase anticipated for fiscal 2016.
HIGH, BUT MANAGEABLE DEBT BURDEN: MADS comprised a high 10.5% of fiscal 2014 operating revenues but was covered a solid 1.9x by net income available for debt service. ECS' ratio of debt outstanding to net income available for debt service was 6.2x in fiscal 2014, which compares favorably to many other charter schools rated by Fitch. Moreover, the school has no identified capital needs or additional debt plans.
SUCCESSFUL CHARTER RENEWAL: Sustained improvement in student academic performance over the next year, that results in a renewal of ECS' charter for a period of more than two years, could yield upward rating movement. Conversely, a reversal in academic performance or political factors could hinder renewal of its charter in June 2016 and result in downward rating pressure.
STANDARD SECTOR CONCERNS: A limited financial cushion; substantial reliance on enrollment-driven, per-pupil funding; high debt burden and charter renewal risk are credit concerns typically common among all charter schools that, if pressured, could negatively impact the rating.
Enterprise Charter School opened in 2003 in the city of Buffalo, NY. It currently serves 398 students in grades K-8, and typically has a sizeable waiting list. ECS is authorized by Buffalo Public Schools (BPS) and has had its charter renewed four times to date, albeit with varying durations. Its current charter expires on June 30, 2016.
LIMITED CHARTER CONSTRAINS RATING, BUT ACADEMICS IMPROVING
ECS last received a short-term two-year charter renewal beginning in July 2014, after a very short one-year renewal in July 2013. Fitch considers two years a very limited period for a charter renewal and believes it presents significant credit risk, constraining the rating. However, the Positive Outlook reflects the fact that, while still for only a two-year term, ECS did receive its fourth charter renewal in 2014. In addition, the school's recently improved academic performance suggests the potential for a longer renewal at its next renewal date in June 2016. ECS will likely begin the renewal process in the fall of 2015.
Fitch notes positively that student academic performance has improved and ECS has demonstrated good growth in math and ELA per New York State Assessment testing. For the 2013-2014 school year, ECS showed the most growth in ELA (9% growth) among all Buffalo area schools. The school demonstrated growth in math as well, but not as strong (3%), which was about middle of the pack. Improvement is attributed to various measures taken by ECS over the past two years including a management restructuring aimed at providing more student and faculty support. BPS noted that it has been impressed with the school's recent academic progress, but that such progress needs to be sustained since academic performance is the primary driver of charter renewal.
ENROLLMENT STABILITY SUPPORTS OPERATIONS
ECS is a small school but enrollment has remained very stable. Enrollment for the current 2014-2015 school year is near full capacity, with 398 students enrolled in kindergarten through eighth grade as of March 31, 2015. This was down slightly from 405 students at the same time last year. The school generally operates at or close to its full capacity of 405 students. ECS also maintains a robust waiting list, with 234 children (59% of existing enrollment) presently wait-listed for the current 2014-2015 school year. At present, 221 students are wait-listed for the upcoming 2015-2016 school year.
ECS recently requested an increase of 72 students to its maximum authorization. If approved, it intends to add one 24-student class to kindergarten, first grade, and second grade starting in the 2015-2016 school year. Based on ECS' current waitlist, demand appears sufficient to manage this enrollment target. School management advised that its current facility can accommodate the additional students with no capital expenditure required. The costs related to hiring additional staff is expected to be covered by the associated per pupil revenue. The state Board of Education is expected to vote on the school's request in late May.
HEALTHY FINANCIAL PROFILE
Typical of charter schools, state per pupil funding makes up the majority of ECS' revenue base. Per pupil funding made up about 82% of fiscal 2014 revenue, in line with prior years. State funding has improved slightly in recent years. Per pupil funding increased about 2.1% to $12,255 per student in fiscal 2015 from $12,005 in fiscal 2014. Management anticipates funding to increase another $150 per student for fiscal 2016. Fitch rates New York State GOs 'AA+'/Stable Outlook.
ECS has generated positive operating margins for the past several years, albeit based on a small revenue base ($5.9 million in fiscal 2014), so surpluses are modest in dollar terms ($250,000). The operating margin was a solid 4.3% in fiscal 2014, though was below the 9.5% average of the prior five fiscal years (2009-2013). According to school management, fiscal 2015 results should be similar to the fiscal 2014 level due partly to enrollment stability and a state per pupil funding increase.
ECS' balance sheet resources are limited, which is typical of the sector. However, the school's liquidity metrics compare favorably to most other Fitch-rated schools and provide an adequate financial cushion, especially at the current rating level. As of June 30, 2014, available funds (unrestricted cash) totaled $3.9 million, up from $3.7 million the prior year. Available funds covered fiscal 2014 expenses ($5.6 million) and outstanding debt ($7.1 million) by an adequate 70.2% and 55.4%, respectively. Fitch expects ECS' financial cushion to remain stable due to its track record of operating surpluses; stable enrollment; and lack of additional debt or capital needs, but notes the importance of maintaining liquidity at current levels due to its small revenue base and high reliance on enrollment-driven per pupil funding.
The fixed-rate series 2011A bonds ($7.1 million outstanding) amortize over 30 years with level debt service through final maturity in 2040. The bonds are the school's only outstanding debt. MADS of approximately $616,000 represented a high 10.5% of fiscal 2014 revenues ($5.9 million), which was in line with prior years and better than many other charter schools rated by Fitch. The high burden is partially offset by ECS' ability to cover MADS from current operations. MADS coverage has been solid, ranging from 1.9x-2.7x over the past four fiscal years; 1.9x in fiscal 2014. Pro forma debt to net available income was a moderate 6.2x, which is also better than many other Fitch-rated charter schools.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 16, 2014);
--'Charter School Rating Criteria' (Sept. 19, 2012);
--'Fitch Affirms Enterprise Charter School (NY) Revs at 'B'; Outlook Positive' (May 6, 2014);
--'Fitch Rates Buffalo, NY's LTGOs 'A+'; Outlook Stable' (April 1, 2015);
--'Fitch Rates New York State's $325MM GO Bonds 'AA+'; Outlook Stable' (March 6, 2015).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Charter School Rating Criteria