OREANDA-NEWS. Fitch Ratings affirms the 'BB' rating on approximately \$54.3 million of charter school revenue bonds, series 2010A 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 revised to Stable from Positive.

SECURITY

The series 2010 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.

KEY RATING DRIVERS

OUTLOOK REVISION: The Stable Outlook reflects greater liquidity risks than Fitch anticipated under a 2012 state settlement agreement between CCCS and Pennsylvania Department of Education (PDE). Liquidity risk is most likely to occur at the end of a fiscal year, when Chester Upland School District's (CUSD) operations may be more pressured. CCCS has partially mitigated this risk by increasing cash balances, and finalizing an \$8 million line of credit. The PDE reimbursed the charter for a delayed June 2014 payment, pursuant to the 2012 settlement agreement procedure, but repayment was not as timely as expected. The delay was at the state level, pending final approval of the commonwealth's 2014-2015 budget.

LIQUIDITY PROFILE: CCCS' balance sheet resources declined at June 30, 2014 due to the delayed PPF payment from CUSD. Fitch's available funds measure is based on unrestricted cash and investments, and thus excludes receivables. The June payment was received in July, 2014. Due to the delay of state reimbursement, at the end of fiscal 2014, CCCS' available funds (AF) ratios were a very low 1.7% of expenses and 1.4% of outstanding debt. Fitch recognizes that once the reimbursement was made, AF ratios increased; however, it highlights the fairly limited level of overall liquidity.

SOUND UNDERLYING OPERATING PROFILE: The 'BB' rating reflects CCCS' positive operating performance, sufficient coverage of transaction maximum annual debt service (TMADS), long 17-year operating history, and multiple charter renewals including a recent five-year renewal through 2021.

CHARTER FUNDING POTENTIALLY UNPREDICTIBLE: CCCS' operating performance is currently solid, with a 7% margin in fiscal 2014, up from 5.4% in FY13. However, CCCS remains highly reliant on per pupil funding (PPF) to support operations, and the PPF rate (90% of which comes from CUSD) is based on the home district's prior year budgeted expenditures. Because CUSD enrollment and operations are stressed, its budget and operating expenses can change year-to-year, making CCCS' annual funding more vulnerable to changes.

ENROLLMENT STABILTIY: CCCS enrollment essentially stabilized in fall 2014, following growth in prior years. Enrollment at Dec. 2014 was 2,944, down about 3% from December 2013 (3,039). This represents over 55% of the students in CUSD, a very high proportion.

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.

Monthly PPF distributions from CUSD were delayed in 2012, which situation was resolved by litigation and a settlement agreement between CCCS and PDE. A payment delay occurred again in June 2014. While the agreed reimbursement mechanism worked, timing was longer than Fitch expected, adding credit risk.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY: CCCS' inability to consistently maintain positive operations and solid liquidity would create downward rating pressure. Legislative changes limiting cash reserves in charter schools would be viewed negatively.

LIQUIDITY: To support the rating, Fitch expects that missed PPF payments by CUSD will be infrequent, the 2012 litigated state funding mechanism will operate efficiently, and timing of any needed state reimbursements are made on a relatively timely basis. The unique liquidity risks caused by the CCCS and CUSD relationship require CCCS to maintain substantial liquidity flexibility, such as strong cash reserves and availability under a bank line of credit.

STABLE ENROLLMENT: Continued enrollment stability is necessary to maintain the current rating.

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.

CREDIT PROFILE

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 90% of CCCS' students come from the CUSD. CCCS experienced consistent enrollment growth over time, leading the charter school to expand its grades K-8 academic offerings to three campuses in 2013. Enrollment stabilized and dipped slightly in fall 2014, down about 3%; management expects enrollment growth for fall 2015.

CCCS has a very 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.

CHARTER RENEWAL

CCCS has received multiple charter renewals during its 17 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.

LIQUDITY VULNERABILITY

CCCS management reports that it has been building operating cash over time. Those levels were needed in June 2014, the last month of CCCS' fiscal year, when budget difficulties at CUSD resulted in failure to make the scheduled monthly \$3.6 million payment to CCCS.

Management reports that it drew down cash balances of about \$3 million to pay vendors in June 2014. Additionally, CCCS notified the state pursuant to a July 27, 2012 settlement agreement to make up the delayed payment. The state made the payment under the agreement, but the timing took longer than anticipated. Fitch had understood in 2012 that the state payment would be made by about the 21st of the month. The payment was made under the settlement agreement in July 2014.

CCCS management reports that the payment was delayed until the Governor signed the commonwealth budget. CUSD resumed scheduled monthly payments to CCCS in July 2014.

This delay reduced CCCS' cash position at June 30, 2014. Fitch measures balance sheet cushion with an available funds calculation, defined as unrestricted cash and investments; this calculation does not recognize receivables. CCCS' 2014 AFs dropped to \$805,000 from \$2.2 million in fiscal 2013. The resulting liquidity ratio was a very weak 1.7% of operating expenses and 1.4% of outstanding debt.

Positively, CCCS had sufficient cash-flow to meet bond covenants at the end of fiscal 2014. Under the bond documents, unrestricted working capital balance in the operating fund must equal at least 5% of operating expenses plus the management fee for the prior fiscal year. At fiscal year-end 2014, excess working capital of \$2.14 million did exceed the \$2.11 million requirement. Cumulative unrestricted cash reserves must also be sufficient to meet all accrued and unrestricted salary obligations; however, such amounts may be included in the unrestricted working capital balance.

CCCS management reports that a bank line of credit was approved on March 18, 2015 for \$8 million. This provides additional cash-flow liquidity in the event of another CUSD payment delay, combined with a delay in the commonwealth's annual budget approval. Separately, debt service is effectively paid monthly to the bond trustee under a lease between CCCS and Friends of CCCS, so no large principal or interest payment is due during a fiscal year. There is also a trustee-held debt service reserve.

ENROLLMENT SOFTENING

Overall enrollment at all three campuses declined slightly in fall 2014 to 2,944 students, about 3.1% below fall 2013 levels. Management attributes the declines to demographic shifts, and expects an increase in fall 2015, and relatively stable enrollment going forward. Management projects positive GAAP operations for the current fiscal 2015 due to expense controls, and significantly higher 2014-2015 PPF rates.

CCCS enrolls the most students in its local district, which Fitch considers unusual, and provides CCCS with an unusual academic and market niche. In fall 2014, CCCS enrolled 2,950 students; another 1,400 attended various public school district (about 90% at CUSD); and another 800 students attended two smaller area charter schools. Fitch will monitor CCCS' enrollment trends, as there may be long-term efforts from CUSD to grow enrollment to stabilize its financial position.

CCCS recently undertook a community-initiated project to open a third campus in Upland Borough (UB) in 2013. Management reports that enrollment at the new campus was somewhat below expectations, with about 275 K-5 students enrolled for fall 2013 (the first year, fiscal 2014), compared to 300 budgeted students. With the addition of sixth grade in fall 2014, second year enrollment improved to 305.

CCCS has no enrollment caps, which Fitch considers positively. The school has substantial capacity, which it chooses not to use. The three campuses have capacity for about 3,500 students.

POSITIVE OPERATING RESULTS

CCCS generated a solid 7% margin in fiscal 2014, up from 5.4% in fiscal 2013. For fiscal 2015, the school again expects positive operating results, in part due to an increase in fiscal 2015 charter school funding rates.

According to CCCS, all charter schools in Pennsylvania calculate their PPF funding rates - for both regular and special education students - based on the underlying public school district's prior year budgeted expenditures. For CCCS, CUSD's budget increased a significant 22% from \$101.4 million in fiscal 2013 to \$123.5 million in fiscal 2014. This resulted in CCCS receiving a corresponding increase in the regular education funding rate per student, from \$7,658 in fiscal 2014 to \$9,468 in fiscal 2015. For fiscal 2016, charter school management expects a PPF decrease.

Fitch views the potential volatility to CCCS' funding rates with caution but notes CCCS' history of managing through significant uncertainty in the past, as well as having a stable management team.

DEBT MANAGEABILITY

CCCS has a high but manageable debt burden, which is common for the charter school sector. TMADS was 9.3% of fiscal 2014 operating revenues, somewhat improved from a five-year average of 10.9%, but still high. Coverage of annual debt service averaged 1.1x between fiscal 2010 and 2014. Fiscal 2014 actual coverage was stronger at 1.8x.

Coverage for transaction MADS of \$4.69 million, including lease costs for the new Upland Borough campus, was also solid at 1.7x in fiscal 2014.