OREANDA-NEWS. July 28, 2015. Fitch Ratings has downgraded the 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):

--\\$16.5 million of civic facilities revenue bonds, series 2007A to 'B' from 'B+'.

Fitch has removed the bonds from Rating Watch Negative and assigned a Stable Outlook.

SECURITY
The bonds are a general obligation of BCCS and are payable from gross revenues composed primarily of state-mandated school district per-pupil aid payments. Bondholders benefit from 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 downgrade to 'B' reflects material risk due to management changes, weak operating performance, a volatile external environment, and a short-term three-year charter renewal. Offsetting factors include adequate academic performance and sound demand and enrollment.

SUFFICIENT COVERAGE EXPECTED: Removal from Rating Watch Negative reflects management's preliminary expectation that fiscal 2015 legal coverage will have exceeded 1x and possibly met the 1.1x covenant. Expected improvement reduces the risk of acceleration due to legal coverage below 1x; remaining risk is in line with expectations for the rating level.

MINIMAL RESERVES: The schools have minimal balance sheet cushion to offset weak operating performance or absorb unexpected pressures. Available funds at June 30, 2014 accounted for a very thin 2.9% of operating expenses. A debt service reserve cash-funded to MADS and generally sufficient coverage from operations provide a limited margin of safety.

RATING SENSITIVITIES

DEBT SERVICE COVERAGE: The Brighter Choice Charter Schools' balance sheet cushion is not sufficient to support debt service coverage below 1x from operations. Failure to generate at least 1x or greater coverage from operations could lead to further negative 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, could negatively affect the rating.

CREDIT PROFILE
BCCS opened in 2002 with a stated 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 proceeds funded the schools' purchase of the facilities from the foundation and certain enhancements. The schools remain fully enrolled at or above their chartered enrollment of 270 each; academic results are adequate and have improved somewhat in recent years.

The schools are authorized by the New York State Board of Regents and have received three charter renewals since inception. The authorizer most recently granted in March 2015 a three-year renewal, short of the five-year term requested by BCCS, due to financial and management concerns. A short-term renewal is a speculative-grade characteristic, but the three-year renewal does not drive the downgrade or constrain the rating at the current level.

MANAGEMENT CHANGES PRESENT CHALLENGE
BCCS has ended its relationship with the Albany Charter School Network (affiliated with the foundation), which had been providing increasing financial management and academic support to the schools. BCCS reports that the network was unable to continue prior levels of academic support owing to external factors.

BCCS has engaged experienced consultants to oversee finances and operations, and is working to rebuild academic support functions internally. Fitch believes BCCS has responded appropriately to the situation, but that the challenges and costs of replacing management functions increase risk over the three-year charter term.

COVERAGE EXPECTED TO IMPROVE
While results are preliminary, management expects that fiscal 2015 legal debt service coverage will have improved to exceed 1x and possibly to meet the 1.1x covenant. Reported improvement is in line with Fitch's prior expectations for fiscal 2015 based on a return to full enrollment and budgeted expenditure reductions.

Legal coverage below 1.1x triggers a consultant call, but legal coverage below 1x, as occurred in fiscal 2014 (0.9x), opens the door for bondholders to accelerate or pursue other remedies that could lead to a default. Fitch believes that improved coverage expectations mitigate this risk somewhat, and that remaining risk related to fiscal 2014 results is appropriately reflected in the 'B' rating.

MINIMAL FINANCIAL CUSHION
The schools have minimal balance sheet cushion to offset weak operating performance or absorb unexpected pressures. Available funds of \\$265,000 at June 30, 2014 are very low relative to operating expenses (2.9%) and debt (1.6%), providing minimal cushion to cover debt service, operating losses, or unanticipated variances to budget. A debt service reserve cash-funded to MADS and generally sufficient coverage from operations provide a limited margin of safety.

Please see Fitch's Brighter Choice Charter Schools press release dated Feb. 2, 2015, available at 'www.fitchratings.com', for additional information.