Fitch Ratings affirms the 'BB+' rating on approximately $17.3 million in
(IDA) 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
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.
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
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.
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
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
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) .
Charter School Rating Criteria
Revenue-Supported Rating Criteria
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