NEW YORK--(BUSINESS WIRE)--
Fitch Ratings downgrades approximately $7.3 million of revenue bonds of the Erie County Industrial Development Agency, issued on behalf of Enterprise Charter School (ECS) in Buffalo, NY to 'BB' from 'BBB-'. Additionally, Fitch places the rating on Rating Watch Negative.
The bonds are secured by a pledge of revenues of ECS, a first mortgage lien on the facilities of ECS, assignments of rents and leases receivable and a cash funded debt service reserve fund.
KEY RATING DRIVERS
SHORT TERM CHARTER RENEWAL: The downgrade to 'BB' reflects the reduced term of ECS' recent charter renewal for one year. Although legal action being pursued currently by ECS could result in a decision to extend the renewal period, the increased volatility in the operating environment and adversarial relationship between the school and the authorizer is not consistent with Fitch's expectation of an investment grade charter school.
UNCERTAINTY IN PROCESS AND RESOLUTION: The Rating Watch Negative reflects the uncertainty of outcome for ECS, which intends to approach the State Supreme Court to obtain a temporary restraining order and pursue a preliminary injunction against the authorizer. If successful, the school would be able to operate indefinitely until a resolution is achieved as to renewal. Failure to receive improved terms or legal relief would likely necessitate the school's acceptance of the one-year charter. Fitch believes it is improbable that within that short time period the school would be able to demonstrate sizeable improvement in academic performance, which was the reason cited for the earlier three-year renewal term.
MANAGEMENT CHANGES IMPENDING: ECS has begun seeking a new CEO to replace its longstanding manager who will be departing the school by month's end. Fitch expects any new replacement to require strong management support to navigate ECS' operating environment.
RATING WATCH CONSIDERATIONS: The Rating Watch reflects uncertainty regarding the outcome of ECS' efforts to obtain a temporary restraining order followed by a preliminary injunction directing that the charter remain active while the renewal litigation is pending. There is significant uncertainty regarding the time period over which this will progress.
OPERATING ENVIRONMENT CHALLENGES
Fitch's downgrade reflects ECS' increasingly unfavorable regulatory environment, a deteriorating relationship with the authorizer and negative events in the external operating environment, all characteristic of a low speculative grade charter school. ECS' stronger financial and debt metrics as well as fully enrolled and built out status continue to support the 'BB' rating at this time.
Following Fitch's March 2013 review of the ECS credit, in May, the Buffalo Board of Education (BBE), ECS' authorizer, reduced the renewal period for the schools' charter to one year following feedback from the state education department. The shortened period, which was based on the school's ongoing failure to achieve academic benchmarks specified in its charter, is in contrast to the original expectation of a renewal term of three years.
The uncertainty associated with an annual renewal cycle is far greater than would be expected for a school that normally operates under a five year charter. In this specific case, Fitch is concerned that while ECS could reasonably be expected to improve its academic performance within a period of three years it is unlikely to demonstrate a similar level of improvement in a shorter renewal period of one year.
The school expects to undertake litigation against the authorizer in the near term. Fitch will continue to monitor the situation as it evolves. If legal efforts are unsuccessful in securing a temporary restraining order/preliminary injunction, Fitch expects the school to accept the one-year renewal to maintain its charter, which would otherwise expire on June 30. ECS' fall enrollment is complete and the school continues to maintain a large waitlist.
For more information on Enterprise Charter School, see Fitch's press release 'Fitch Downgrades Enterprise Charter School (NY) to 'BBB-'; Outlook Negative' dated March 8, 2013.
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 6, 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Charter School Rating Criteria
- Security Upgrades & Downgrades
- Fitch Ratings
- charter school
James George, +1-212-908-0652
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Colin Walsh, +1-212-908-0767
Laura Porter, +1-212-908-0575
Elizabeth Fogerty, New York, +1-212-908-0526