OREANDA-NEWS. Fitch Ratings has affirmed the rating on following bonds issued by the Albany Industrial Development Agency (NY) on behalf of the Brighter Choice Charter School for Boys and the Brighter Choice Charter School for Girls (together, BCCS):

--$16.1 million of civic facilities revenue bonds, series 2007A at 'B'.

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of BCCS and are payable from gross revenues: primarily state-mandated school district per-pupil aid payments. Further security includes a cash-funded reserve equal to maximum annual debt service (MADS), other reserve funds under the indenture and a first mortgage lien on the two school facilities.

KEY RATING DRIVERS

HIGHLY SPECULATIVE CREDIT CHARACTERISTICS: The 'B' rating reflects material risk due to an ongoing technical default through fiscal 2015, a short three-year charter renewal term through 2018, a trend of volatile operating performance and minimal financial cushion. Offsetting factors that provide a margin of safety include: adequate academic performance, solid enrollment trends, improving financial results and stabilized management.

OPERATIONS IMPROVE; TECHNICAL DEFAULT CONTINUES: As calculated under the bond documents, coverage remained below 1x in fiscal 2015, which is an event of default. However, operating results did improve materially. BCCS covered debt service from operating cash flow, and Fitch estimates that results would have met the 1.1x coverage covenant excluding certain non-recurring, non-cash write-offs. Management believes fiscal 2016 coverage will meet the 1.1x bond covenant requirement.

MINIMAL RESERVES: The schools have minimal balance sheet cushion to offset weak operating performance or absorb unexpected pressures. Available funds at June 30, 2015 accounted for a very thin 3.6% of operating expenses and 1.9% of debt.

RATING SENSITIVITIES

DEBT SERVICE COVERAGE: The Brighter Choice Charter Schools (BCCS) expect to meet debt service coverage covenants in fiscal 2016. Certified coverage in excess of 1x as calculated under the bond documents would cause BCCS to exit technical default and, in conjunction with continued operating improvement, could lead to positive rating action.

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 which, if pressured, would negatively affect the rating.

CREDIT PROFILE

BCCS opened in 2002 with a mission to provide a single-gender public school alternative for students from economically disadvantaged families. The schools were launched with the support of the Brighter Choice Foundation, which developed the facilities. The 2007A bond proceeds funded the schools' purchase of the facilities from the foundation and certain enhancements. The K-4 schools remain fully enrolled at or above their chartered enrollment of 270 each; academic results are generally equal to or stronger than those of the Albany City School District but weaker than statewide results.

The schools are authorized by the New York State Board of Regents and have received three charter renewals since inception. In March 2015, the authorizer granted a three-year renewal, short of the full five-year term requested by BCCS, due to financial and management concerns. A short-term renewal is a speculative-grade characteristic. The elementary schools are legally separate from and have no obligations related to the Brighter Choice Charter Middle Schools, which lost their charters and were closed at the end of the 2014-2015 academic year.

EXPANSION NOT A CONCERN

BCCS recently obtained authorizer permission to expand into fifth grade, which it will open for fall 2016. Management reports that the schools are on track to fill the new grade level at both schools from continuing students (an increase of about 40 students each). Constructions costs to accommodate the expansion were manageable, and additional enrollment is expected to result in net improvement to operating results. Fitch considers the authorizer's support of the fifth grade expansion a credit positive and an indication that material concerns at the time of the last charter renewal are being addressed.

STABILIZED MANAGEMENT

In 2015, BCCS ended its relationship with the Albany Charter School Network (affiliated with the foundation), which had been providing financial management and academic support to the schools. BCCS reports that the network was unable to continue prior levels of support due to external factors. In addition, the management contract with the network had drawn public criticism over its structure. BCCS has engaged experienced outside consultants to support finances and operations, and has maintained academic functions internally.

TECHNICAL DEFAULT CONTINUES

Fiscal 2015 debt service coverage fell short of Fitch's prior expectations and remained below 1x as calculated under the bond documents. Coverage below 1.1x triggers a consultant call, but coverage below 1x, as occurred in fiscal 2014 and 2015 (Fitch estimates 0.9x and 0.8x, respectively), is an event of default under the documents and allows for bondholders to accelerate or pursue other remedies that could lead to a payment default. All debt service payments have been made on time. Fitch understands that bondholders have neither accelerated nor provided a formal covenant waiver, but are actively monitoring BCCS' operations.

Despite continued technical default, underlying operations did improve materially in fiscal 2015; further improvement is projected for the fiscal year ended June 30, 2016. Fitch believes that improved coverage expectations and a reportedly constructive relationship with bondholders mitigates this risk somewhat, and that remaining risks related to the technical default are appropriately reflected in the 'B' rating.

UNDERLYING FINANCIAL IMPROVEMENT

Weakened GAAP-basis results in fiscal 2015 mainly reflect non-recurring bad debt write-offs. Management reports that fiscal 2015 included a "clean-up" of accounts as part of bringing in a new CFO and instituting reporting and financial controls; the most notable effect was writing off all aged receivables. Operating cash flow was sufficient to cover debt service in fiscal 2015. Fitch estimates that, excluding non-recurring bad debt expense, fiscal 2015 coverage would have been about 1.2x, in excess of covenant requirements. Interim results through the third quarter of fiscal 2016 show results ahead of the prior year. The schools project a balanced budget and compliance with all covenants in fiscal 2016.

MINIMAL FINANCIAL CUSHION

The schools have minimal balance sheet cushion to offset weak operating performance or absorb unexpected pressures. Available funds of $318,000 at June 30, 2015 are very low relative to operating expenses (3.6%) and debt (1.9%), providing minimal cushion to cover debt service, operating losses, or unanticipated variances to budget. A debt service reserve cash-funded to MADS is not included in Fitch's available funds but provides a small margin of safety.