OREANDA-NEWS. Fitch Ratings has maintained approximately $52.38 million of charter school revenue bonds, series 2010A issued by the Delaware County Industrial Development Authority, PA (DCIDA) on Rating Watch Negative. The bonds, which are rated 'BB-' by Fitch, were issued on behalf of Chester Community Charter School (CCCS).


The series 2010A 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 about $4.1 million. Management fee payments to CSMI, LLC (CSMI) are subordinated to the payment of debt service and DSR replenishment.


PRESSURED OPERATING PERFORMANCE: The 'BB-' rating reflects CCCS' operating deficit in fiscal 2015, a projected deficit in fiscal 2016, thinning debt service coverage and slim liquidity. Fitch maintains the Rating Watch Negative due to concern over CCCS achieving balanced operations by fiscal 2017.

ENROLLMENT DRIVES PERFORMANCE: The achievement of break-even operations in fiscal 2017 depends on fall 2016 enrollment growth, which management reports has been achieved. Fiscal 2016 financial statements are not yet available, pending year-end revenue PPF revenue adjustments. Such adjustments have trended positively over the last few years. According to management, CCCS enrollment at the end of the 2015/2016 academic year was 3,318, and additional growth is reported for 2016/2017.

LIMITED BALANCE SHEET: CCCS' cash position remains very slim. CCCS' available funds at June 30, 2015 (AF; or unrestricted cash and investments) of $3.6 million equaled a very low 4.9% of expenses and 5% of outstanding debt.

2016 STATE FUNDING DELAYS: CCCS continues to carry $12 million out of a $30 million authorized taxable cash-flow facility. This provided cash-flow during the commonwealth's fiscal 2016 budget impasse, and while waiting for FYE 2016 revenue reconciliations. The commonwealth appropriated a full year education appropriation for fiscal 2017. The Fitch Issuer Default Rating for the Commonwealth of Pennsylvania is 'AA-/Outlook Stable).

AUTHORIZOR IN RECEIVERSHIP; PROVEN INTERCEPT: The Chester Upland School District (CUSD) has been in receivership since December 2012. CCCS revenues flow through CUSD and in the event CUSD's monthly PPF distributions are delayed, legal and structural provisions include a tested trustee intercept of state aid that provides first for debt service and secondly for operations.


BALANCED OPERATIONS: The bonds remain on Rating Watch Negative pending receipt of Chester Community Charter School's (CCCS) fiscal 2016 audit, and disposition of the outstanding cash-flow facility balance. An operating deficit of some level is expected for fiscal 2016. Failure of CCCS to achieve fiscal 2017 operating balance and meet debt service coverage would result in a negative rating action.

LIQUIDITY: Improved fiscal 2017 cash-flow with a full-year fiscal 2017 commonwealth appropriation, in contrast to 2016 with state budget delays, should allow CCCS to pay off its external cash-flow facility and gradually build balance sheet reserves.

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 which, if pressured, could negatively affect CCCS's rating.


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. About 80% of CCCS' students come from the CUSD. CCCS experienced enrollment growth, leading the charter school to expand grades K-8 academic offerings to three campuses in 2013. Enrollment grew in fiscal 2016, ending at 3,318 students, up from 2,978 at the beginning of the year. Management reports an increase of another 300 students for fiscal 2017, indicating solid demand.

CCCS has a strong relationship with CSMI, which was formed specifically to manage the charter school's operations. CSMI's management strategy has been fiscally conservative, resulting in historically balanced operations and stronger academic performance than CUSD.

CCCS revenues flow through CUSD and in the event CUSD's monthly PPF distributions are delayed, legal and structural provisions include a tested trustee intercept of state aid that provides first for debt service and secondly for operations. This mechanism was tested in June 2014 when the Pennsylvania Department of Education (PDE) reimbursed CCCS for delayed payments, pursuant to the 2012 settlement agreement procedure, although repayment was not as timely as expected due to delays in finalizing the commonwealth's 2014-2015 budget. Additional information is provided in Fitch's press release dated March 23, 2015, available at wwww. fitchratings. com.


CCCS has received multiple charter renewals during its 18-year operating history, which Fitch views favorably. Following its initial three-year charter, the charter has received four five-year renewals. The most recent five-year charter renewal was granted in August 2014 by CUSD, and is effective July 1, 2016 through June 30, 2021.


For fiscal 2017, the commonwealth of Pennsylvania passed a budget covering the full fiscal year, including modest increases in overall education funding. In fiscal 2016, the commonwealth's nine-month budget impasse pressured cash-flow for school districts and charter schools state-wide.

CCCS negotiated external cash flow facilities to bridge the state funding delay. CCCS secured a $10 million bank line of credit in calendar 2015, which it subsequently repaid and converted to a $30 million privately placed facility, all of which was drawn in fiscal 2016. Most of the delayed education payments were made at the end of fiscal 2016, and the RAN was repaid when due on June 30, 2016. CCCS renewed the liquidity facility on July 1, 2016, and management reports that $12 million remains outstanding. Management expects to reduce the balance as revenue reconciliation payments are received, but expects to carry some balance through fiscal 2017.


CCCS is highly reliant on PPF (90% of which comes from CUSD) to support operations. Periodic reconciliation adjustments are made based on enrollment and the home districts' annual operating expenditures, from which CCCS typically benefits. For fiscal 2016, CCCS is still waiting for the commonwealth and CUSD to complete the required true-up reconciliations.

For fiscal 2015, operating performance weakened to negative 1.8%, primarily due to a one-time extraordinary expense. This is in contrast to generally positive margins, including a 7% margin in fiscal 2014. As part of a settlement agreement with CUSD, CCCS wrote off a $5.6 million tuition receivable from CUSD in exchange for more stable revenue computations over the next 10 years, which negatively impacted fiscal 2015 operating results. The 10-year settlement agreement was made among multiple parties, including the PA Department of Education, the CUSD school board, the CUSD receiver, and CCCS. It establishes a minimum special education PPF rate for CCCS, held harmless in the event of future changes in state charter school laws.

For fiscal 2016, operations are impacted by lower special education PPF amounts, also negotiated in the above settlement agreement. Payment will be based on the regular education tuition rate ($10,683 at that time), multiplied by 2.53x; however, the rate cannot fall below $27,029 for each CCCS/CUSD special education student. While providing a stable funding floor, this represents a fiscal 2016 decline of CUSD special education funding from the then-current $40,000 per student. For fiscal 2016, the reduced special education rate is partly contributing to a projected operating deficit. Long-term, CUSD management expects this agreement will be revenue neutral overall, and projects meeting operating balance in fiscal 2017.


Strong student demand supports CCCS enrollment, and management expects that to continue given academic and financial pressures at both CUSD and neighboring school districts. CCCS budgeted for 3,500 students for fall 2016 (fiscal 2017), and as of September 2016, reports 3,618 students.

There is limited charter-school competition for CCCS, as over half of CUSD's K-8 student population attends CCCS. The charter school provides a significant level of educational capacity in the area, which while atypical of the sector, provides CCCS with an unusually strong market niche. There are no limits on the number of students that can be enrolled by CCCS. Management reports that it has facility capacity for up to 3,700 students after adding trailers to the East Campus. With the enrollment increase in fall 2016, CCCS is nearing capacity.


CCCS has a high but manageable debt burden, which is common for the charter school sector. TMADS was 8.4% of fiscal 2015 operating revenues, somewhat improved from a five-year average of 10.3%, but still high. However, the need to secure external funding to manage fiscal 2016 cash-flow, which is continuing into fiscal 2017 (a year that has a full state education budget in place), stresses CCCS and heightens credit risk.

Coverage of annual debt service averaged 1.0x between fiscal 2011 and 2015. Fiscal 2015 coverage was lower at about 0.9x. When fiscal 2015 operations are adjusted to exclude the $5.6 million one-time receivable cancellation, TMADS coverage is a sound 2.1x. Coverage of debt service from operations below 1.0x is characterized by Fitch as a low speculative-grade attribute for charter schools.

Fiscal 2016 operating projections are not available, but an operating deficit is expected. Fitch expects improved TMADS coverage in fiscal 2017, at least 1.0x, even if management fees need to be deferred or subordinated to meet coverage requirements.