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.
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
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
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.
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.
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 strongrelationship 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.
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
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).
Charter School Rating Criteria
Revenue-Supported Rating Criteria
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