OREANDA-NEWS. March 25, 2016. (This is a correction to a press release originally published on March 22, 2016. It corrects the rating for the the Delaware County Industrial Development Authority, PA (DCIDA), which was downgraded to 'BB-' from 'BB'.

Fitch Ratings has downgraded approximately \\$54.3 million of charter school revenue bonds, series 2010A issued by the Delaware County Industrial Development Authority, PA (DCIDA) to 'BB-' from 'BB'. The bonds are issued on behalf of Chester Community Charter School (CCCS).

Fitch has also placed the bonds on Rating Watch Negative.

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

PRESSURED OPERATING PERFORMANCE: The downgrade to 'BB-'/Rating Watch Negative reflects Fitch's concern over CCCS' ability to stabilize its financial profile. CCCS reported operating deficits in fiscal 2015 and fiscal 2016 (projected) resulting in thinning debt service coverage and slim liquidity. CCCS is transitioning to a new long-term revenue framework grounded in lower per pupil funding (PPF). A 10-year negotiated settlement provides for reduced special education PPF, resulting in a lower expected revenue base.

ENROLLMENT DRIVES PERFORMANCE: The achievement of break-even operations in fiscal 2017 is dependent upon enrollment growth of approximately 4.9% (150 students) and expenditure reductions of 4.2% or \\$2.25 million. CCCS projections do not currently include year-end revenue PPF revenue adjustments, which have trended positively over the last few years and could provide added cushion if realized again in fiscal 2017. According to management, CCCS enrollment is currently about 3,100 after experiencing modest growth in 2015-2016.

LIMITED BALANCE SHEET: CCCS' cash position is slim. CCCS' audited fiscal 2015 available funds (AF; or unrestricted cash and investments) of \\$3.6 million equates to a very low 4.9% of expenses and 5% of outstanding debt. Absent offsetting action, management anticipates using AF to partially cover the reduction in per pupil funding through the 2016 school year.

STATE FUNDING DELAYS; EXTERNAL LIQUIDITY: CCCS's \\$30 million taxable revenue anticipation notes, series 2015 (RAN) issued in Nov. 2015 temporarily mitigates operating risk caused by the commonwealth's budget impasse continuing into its ninth month. While CCCS has managed operations well, the external funding environment adds credit risk. The RAN matures on June 30, 2016 and CCCS expects to issue new RANs or extend it through December 2016.

AUTHORIZOR IN RECEIVERSHIP; PROVEN INTERCEPT: The Chester Upland School District (CUSD) has been in receivership since December 2012. CCCS revenues flow through the 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 first tested in June 2014 when the Pennsylvania Department of Education (PDE) reimbursed the charter for delayed payment, pursuant to the 2012 settlement agreement procedure, but repayment was not as timely as expected due to delays in the commonwealth's final approval of the 2014-2015 budget. Additional information is provided in Fitch's press release dated March 23, 2015, available at wwww.fitchratings.com.

RATING SENSITIVITIES

ABILITY TO OUTPERFORM PROJECTIONS: Failure of Chester Community Charter School to outperform fiscal 2017 projections which show low cash levels and breakeven operations despite budgeted enrollment growth and expense reductions will likely result in a downgrade to the 'B' category. Fitch believes the school's key source of flexibility is in its ability to grow enrollment and cut spending beyond what is budgeted and realize additional revenues through the CUSD annual year-end rate adjustment of tuition revenue based on CUSD final budgeted expenditures.

LIQUIDITY: The stressed liquidity caused by state budget delays, as well as the unique CCCS and CUSD relationship, required Chester Community Charter School to obtain an external cash-flow facility. Increased expenses related to the facility, as well as potential extension costs, add credit risk which, if not managed, would drive a downgrade.

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 impact Chester Community Charter School's 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 80% 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 remains stable in fall 2015 at about 3,024; management reports that final enrollment at the end of the 2015-2016 academic year will be closer to 3,100.

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.

Fitch notes the following criteria deviation per its internal policies and procedures. Per Fitch's charter school criteria, Fitch is required to attempt to correspond with the authorizer associated with this credit, CUSD. After multiple attempts, there was no direct contact. Given the sufficiency of the available information, and a recent charter renewal, Fitch believes it is provided with reasonable confirmation from the management team that the school is in compliance with charter requirements. Available financial and enrollment data support that determination.

CHARTER RENEWAL

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.

LIQUIDITY FLEXIBILITY

The commonwealth of Pennsylvania's nine-month impasse over the fiscal 2016 budget continues to put operating pressure on school districts and charter schools state-wide. CCCS has been forced to obtain external financing to manage its cash flow due to delays in state funding. The school secured a \\$10 million bank line of credit in calendar 2015, which it subsequently repaid and converted to a \\$30 million privately placed RAN which is due June 30, 2016. At this time the full \\$30 million balance has been drawn, with expectations of repaying it when the state approves the second half of K-12 education appropriations later this spring. Fitch believes the RAN financing adds further credit risk due to the added interest expense and refinancing risk. Fitch notes that debt service on the series 2010A bonds is paid monthly to the bond trustee, so no large lump-sum debt service payment is due at the end of a fiscal year. There is also a trustee-held debt service reserve.

OPERATING PERFORMANCE

CCCS is highly reliant on PPF to support operations and the PPF rate (90% of which comes from CUSD). Periodic true-up adjustments are made based on enrollment and the home district's annual operating expenditures, which CCCS typically benefits from. To date in fiscal 2016, because of the state budget impasse, no true-up calculation has been made.

Operating performance weakened in fiscal 2015 to negative 1.8%, after generally positive margins (and a 7% margin in fiscal 2014), due to a one-time extraordinary expense. As part of its settlement agreement with CUSD, CCCS has written off a \\$5.6 million tuition receivable from CUSD in fiscal 2015 in exchange for more stable revenue computations over the next 10 years. 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, and establishes a minimum special education PPF rate, irrespective of future changes in state charter school laws.

The agreed special education PPF amount is based on the regular education tuition rate of \\$10,683, with that figure multiplied by 2.53x; however, the rate cannot fall below \\$27,029 for each CUSD special education student. While providing a stable funding floor, this represents a decline of CUSD special education funding from the current \\$40,000 per student. This reduced special education rate is partly contributing to the projected weaker 4.0% fiscal 2016 operating deficit, and adding pressure for the fiscal 2017 budget.

ENROLLMENT BUDGET
Strong student demand supports CCCS enrollment. CCCS management expects continued academics and financial pressures at both CUSD and neighboring school districts will support enrollment growth at CCCS. CCCS is budgeting a 4.9% increase in enrollment from the current 3,100 students to 3,250 students in fall 2016, which Fitch believes is reasonable. However, given CCCS's thin operating performance, achieving or exceeding that enrollment target in fall 2016 is critical to meeting the fiscal 2017 operating budget.

There is limited charter-school competition for CCCS. Further, about 54% 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 caps/limits on the number of students that can be enrolled by CCCS. Management reports that it has facility capacity for up to 3,500 students.

Fitch will monitor CCCS' enrollment trends, as there may be long-term efforts from CUSD to grow enrollment to stabilize its financial position.

DEBT MANAGEABILITY

CCCS has a high but manageable debt burden, which is common for the charter school sector. However, the need to secure external funding to manage cash-flow places further stress on CCCS and heightens the risk to the series 2010 bondholders. TMADS was 8.4% of fiscal 2015 operating revenues, somewhat improved from a five-year average of 10.3%, but still high. Coverage of annual debt service averaged 1.0x between fiscal 2011 and 2015. Fiscal 2015 coverage was lower at about 0.9x and is expected to be reduced further in fiscal 2016 given weaker operating performance. Coverage of debt service from operations below 1.0x is characterized by Fitch as a low speculative-grade attribute for charter schools.

If operating expenses in fiscal 2015 are adjusted to exclude \\$5.6 million, representing the one-time receivable cancellation, TMADS coverage would have been a sound 2.1x. 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.