Charter Schools Increase New Bonds Most Since 2007: Muni Credit
U.S. charter schools are issuing municipal debt at the fastest pace since 2007 as enrollment grows, national networks expand and the lowest yields in a generation spur construction and refinancing.
The independent public schools operate without many of the rules governing traditional institutions in exchange for more accountability for student achievement. They have sold about $580 million of munis this year through August, the most since $644 million in the same period of 2007, data compiled by Bloomberg show. Issuance of the riskiest debt -- about half the deals are unrated -- has climbed even as charter defaults are set to be the most since 2009.
In May, six months after Atlanta-area schools run by followers of a Turkish imam borrowed $19 million to build a new campus, the organization defaulted. The local district refused to renew its charter. Also in May, a Michigan school learned its charter wouldn’t be renewed, according to a notice to bondholders.
“The charter student population in this country is ever- increasing as parents have become more comfortable with the charter movement and as a lot of quality charter organizations have proven themselves to be more permanent and not fly-by-night as some parents may have feared,” said John Snider, head of RBC Capital Markets’ (RY) charter-school finance group in Phoenix.
This week, as 50 million U.S. public-school students return to class, about 2 million will be attending charter schools. That’s about six times more than a decade ago, according to the nonprofit National Alliance for Public Charter Schools.
Fewer than 8 percent of the 5,300 charter schools in the U.S. have borrowed through the $3.7 trillion U.S. municipal market, according to Wendy Berry, a consultant for the Local Initiatives Support Corp., a nonprofit community development organization established by the Ford Foundation in 1979.
A former Moody’s Investors Service analyst, she co-wrote a 2011 survey of the segment. There’s about $5.5 billion in charter-school securities, according to Berry.
In this year’s biggest charter sale, Uplift Education, a nonprofit that runs 26 schools in the Dallas-Fort Worth area, in April priced about $81 million of debt, including a 30-year tax- exempt part at 5.125 percent.
The yield was 1.66 percentage points more than AAA bonds, down from a gap of 2.04 percentage points when Uplift sold in 2010, Bloomberg data show. The issues are rated BBB- by Standard & Poor’s, the lowest investment grade.
“You have seen spreads tighten, but probably less than the high-yield market,” said Lyle Fitterer, a managing director at Wells Capital Management in Menomonee Falls, Wisconsin. “They tend to lag the broader high-yield market just because there tends to be less liquidity.”
As investors have sought riskier debt to bolster returns this year, high-yield munis have been the strongest part of the U.S. local-bond market. The segment has returned 13.4 percent, compared with 6 percent for the whole muni market, according to S&P data.
In trading yesterday, yields on top-rated tax-exempts due in 10 years fell 0.1 percentage point to 1.75 percent, close to a one-month low, Bloomberg Valuation data show. The record low was 1.63 percent in July.
Unlike public school districts, charters schools lack taxing power. They receive public funding based on enrollment and use the revenue to fund instruction and facilities.
Bondholders have less security because charter schools are at risk of losing revenue if enrollment declines. The schools have other risks: Charters can be revoked, state aid may be cut and laws regarding charter schools can change. As a result, borrowing costs exceed those of public schools that issue general obligations.
The average interest cost for charter bonds is 2.04 percentage points more than top-rated debt, according to Berry’s 2011 survey.
For some investors, the risks outweigh the rewards.
“In certain cases, charter schools provide a viable academic option and a valuable service,” said Jim Pass, a managing director at Guggenheim Partners, which manages $9 billion of munis and has headquarters in New York and Chicago. “However, financial strength is still developing.”
Of the 478 charter school bond issues offered through 2010, 3.1 percent had a payment default, according to Berry. State and local general obligations have a default rate of 0.01 percent, according to Municipal Market Advisors in Concord, Massachusetts.
There have been three payment defaults this year by charter schools and two more may follow, which would be the most since 2009, said Matt Fabian, a managing director at MMA.
In October, the Fulton Science Academy in Alpharetta, Georgia, borrowed $18.9 million to build a new campus. Leaders of the academy have ties to a Turkish imam, Fethullah Gulen, whose followers run 120 charter schools in the U.S., according to the New York Times.
Two months after the issue, the Fulton County School District denied a proposed 10-year charter renewal, saying the length wasn’t acceptable. The state school board rejected an appeal.
In a May 15 notice, Wells Fargo, the bond trustee, said Fulton Science Academy omitted material information in the official statement for the issue about the county district’s reservations about renewing the charter.
Holders of the debt, which is secured by land bought by the school, got back about $9 million on an accelerated basis, the trustee said in a July filing.
The remainder of the bonds traded in June at 73 cents on the dollar, according to Bloomberg data.
A June audit by the Fulton County school district found the academy approved $70,000 in no-bid contracts with a nonprofit organization even though school officials sat on its board.
Kenan Senar, principal of the academy, which now operates as a private school, didn’t return a call seeking comment.
Another reason for the growing charter school issuance is the emergence of multistate operators such as the Knowledge Is Power Program, which have established a reputation for managing schools well and boosting achievement, said Thomas Stoeckmann, a senior research analyst at Wells Capital Management.
Foundations including the Bill & Melinda Gates Foundation have donated hundreds of millions of dollars to charter schools and are supporting the larger management groups, he said.
“Their concern and their desire is to grow this faster,” Stoeckmann said. “A big push within the industry in scalability.”
In Texas, Uplift Education sold tax-exempt revenue bonds as well as $20 million of Qualified School Construction Bonds in April. Proceeds are going toward improving campuses and refinancing higher-cost debt. Uplift opened its first school in 1997 and educates about 7,500 students. It has a waiting list of more than 8,400, according to its 2012 bond offering statement.
Investors placed 2.5 times more orders than there were securities available, allowing the network to lower yields, said Bill Mays, its chief financial officer.
Mays said he’s considering refinancing debt issued in 2005 in December.
“The bond market is still looking good,” Mays said.
Following are pending sales:
SAN ANTONIO plans to sell $175 million on behalf of its water system as soon as today, according to offering documents. The proceeds will be used for construction and refunding. (Updated Sept. 6)
ILLINOIS FINANCE AUTHORITY is set to issue $181 million of revenue bonds on behalf of OSF Healthcare System as soon as today. The proceeds will refinance debt and support capital projects, according to bond documents. (Updated Sept. 6)
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