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TMCNet:  Fitch Affirms Brighter Choice Charter Schools (NY)'s Revs at 'BB+'; Outlook Revised to Negative

[February 03, 2014]

Fitch Affirms Brighter Choice Charter Schools (NY)'s Revs at 'BB+'; Outlook Revised to Negative

NEW YORK --(Business Wire)--

Fitch Ratings affirms the 'BB+' rating on approximately $17.3 million in (IDA (News - Alert)) civic facility revenue bonds for the City of Albany (City) Industrial Development Agency. The bonds are issued on behalf of the Brighter Choice Charter School for Boys and for Girls, jointly known as the Brighter Choice Charter Schools (BCCS).

The Rating Outlook is revised to Negative from Stable

SECURITY

Civic facility revenue bonds (the bonds) are a general obligation of BCCS and are payable from gross revenues comprised mainly of state mandated school district per-pupil aid payments. Bondholder protections include a cash funded reserve equal to maximum annual debt service on the bonds; a per-pupil aid payment cash flow fund equal to two months of debt service and a $125,000 repair and replacement account and a first mortgage lien on the two school facilities.

KEY RATING DRIVERS

NEGATIVE OUTLOOK: The Negative Outlook reflects BCCS' weakened operating performance for fiscal 2013 driven largely by increased staffing costs and reduction in per pupil revenues. Improvement in operating performance will require expense management which Fitch believes will be challenging as the schools target cost bearing initiatives to improve academic performance. Inconsistent financial performance and a weak liquidity position continue to limit the school's rating to the speculative grade category.

COVERAGE LEVELS DECLINE: Weaker fiscal 2013 operations reduced BCCS' margin and coverage from net income which declined to 1.02x from 1.20x in fiscal 2012. BCCS' DSC covenant of 1.10x was not met for fiscal 2013 which will necessitate the school to retain a consultant to remediate the covenant violation.

DEBT BURDEN JUST MANAGEABLE: Both, BCCS' MADS burden, which consumed 14.1% of FY2013 unrestricted operating revenue and the long term debt to net income ratio of 13.8x, are marginally weaker than fiscal 2012 but expected to improve for fiscal 2014.

BRIGHTER CHOICE FOUNDATION (BCF): BCCS, BCF's first schools in the city, are part of the Albany Charter School Network. Nine participant schools benefit from the foundation's oversight, education policy research, lobbying efforts, fundraising ability, operational and management support from the foundation.

RATING SENSITIVITIES

OPERATIONAL IMPROVEMENT REQUIRED: Growth in operational surplus and improvement in margin is required to stabilize the rating. Further detraction from the margin and inability to balance operations will likely result in a downgrade.

IMPROVED ACADEMIC PERFORMANCE NECESSARY: BCCS' inability to improve student performance in the coming year under the Common Core curriculum may affect the schools' charter renewal due in June of 2015. A renewal short of a full five years would in Fitch's opinion, pressure the current 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.

CREDIT PROFILE

BCCS opened in 2002 with a stated mission to provide a public school alternative for students from economically disadvantaged families. BCCS continues to benefit from a strong relationship with BCF, a private not-for-profit ntity created to provide financial and programmatic support of its charter schools in the city of Albany.


NEGATIVE OPERATING MARGINS DRIVE WEAKER DS COVERAGE

BCCS' margin trend has fluctuated over the past five years. Fiscal 2013' margin, negative 1.2%, was a result of added staffing expenses and a lower student count (by plan) than fiscal 2012. BCCS' previous outlook anticipated a positive margin for fiscal 2013. This unanticipated weaker margin is reflected in the negative outlook. Fiscal 2014 results are expected to be improved with a light surplus; however, the ability to consistently generate operational surpluses is required to stabilize the current rating.

The school's fiscal 2013 operating loss (on a GAAP basis) of $105,000, provided net income available sufficient to cover just 1.02x annual debt service calculated at $1.25 million for FY2013. BCCS did not meet its DS coverage covenant of 1.10x in FY2013 and will consequently be required to retain a consultant this operating cycle. The covenant violation did not trigger an event of default.

The debt burden for BCCS is relatively unchanged at a relatively moderate 14.1% of unrestricted operating revenue, reflecting MADS payable in 2015. BCCS' total long term debt accounted for 13.8x net income available for debt service in fiscal 2013. This ratio calculates the number of fiscal cycles required to fully retire long term debt assuming use of entire operational surplus to pay down outstanding principal.

ENROLLMENT AT CAPACITY

BCCS' enrollment figures grew to over full capacity in the 2011-2012 school year to 553 students. Classes were trimmed in fiscal 2013 and student size totaled 545, reflecting a manageable student count. For fall of 2013 the schools enrolled 546 students. BCCS has an actively managed wait list that strategically oversubscribes each grade by 10% of capacity to counter possible student attrition. Additionally, a high percentage of BCCS graduates (80%) enroll in the Brighter Choice Middle Schools located across the street from the Elementary schools. This ensures that the benefit of the elementary instructional program is extended to the middle schools.

WEAK LIQUIDITY A CONCERN

BCCS' available funds as of June 30, 2013, or cash and investments not restricted, declined precipitously to $61,000 from $851,000 in fiscal 2012. This drop was primarily a consequence of late payments by the school districts. During the year, these payments 'true up' the cash levels for BCCS; the schools use funds on hand to cover expenses while awaiting per pupil funds. However, at fye 2013, the late remittance of funds caused recorded balance sheet resource levels to decline. For the first quarter fiscal 2014, BCCS had cash balances of over $700,000, indicating the receipt of payments post the close of the school year. Nevertheless, FY2013 liquidity levels were quite weak with unrestricted cash and equivalents equating to less than 1% of either operating expenses or long term debt.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Charter School Rating Criteria' (Sept. 2012);

--'Revenue-Supported Rating Criteria' (May 2013);

--'Fitch Affirms 'BB+' on Brighter Choice Charter Schools (NY); Outlook Stable' (March 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=819239

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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