WASHINGTON — The Maryland Health and Higher Educational Facilities Authority is expected Wednesday to price the state’s first charter school municipal bonds, an achievement 18 months in the making and another sign that investor appetite for credit risk has returned.
The authority expects to issue $13.4 million of tax-exempt bonds and $410,000 of taxable debt — though not Build America Bonds — to finance expansion projects for the Patterson Park Public Charter School in Baltimore.
The bonds are rated BBB-minus by Standard & Poor’s and BBB by Fitch Ratings, and the tax-exempts are expected to mature between 10 and 35 years. The taxable bonds are tentatively set to mature in 2014.
The transaction is notable not for its size, but because it is part of a rebound in charter school debt issuance. The deal initially was scheduled to be sold in September 2008 at the height of the credit crisis, according to William Wildman, managing director at RBC Capital Markets, the bonds’ underwriter.
“Bond markets pretty much shut down for a year” for this credit, Wildman said last week.
As most investors last year avoided such triple-B credits, which receive no attention from bond insurers, charter schools’ issuance dropped from a 2007 peak of more than $600 million to $87.5 million in 2009, according to data from Thomson Reuters. Through the first two months of this year, charter schools have already issued $40.8 million.
Charter schools’ issuance this year will begin to catch up with student enrollment and pent-up expansion projects, sources said.
There were 1.4 million students in charter schools in 2009, the National Charter School Research Project reported in January.
But national charter school enrollment would have been 25% higher if the schools were able to accommodate their waiting lists, according to data from Piper Jaffray & Co.
Investors still have reasons to be cautious with these credits, market participants said. Last year, 143 charter schools closed, the Piper report said.
U.S. Education Secretary Arne Duncan, speaking last July before the National Alliance for Public Charter Schools, said the charter school movement “is putting itself at risk by allowing too many second-rate and third-rate schools to exist.”
The charter school community needs “more serious” accountability, similar to what the American Bar Association and American Medical Association provide for their fields, he said.
Patterson Park opened in 2005 after parents organized to start the charter school. However, before it opened, many of the area’s young families left for the suburbs and the better school districts located there, according to Wildman. This school year, Patterson Park started with 564 K-8 students.
Students throughout Baltimore are admitted on a first-come, first-served lottery system. Patterson Park’s enrollment has been oversubscribed every year.
Patterson Park faces challenges similar to most charter school borrowers, including limited balance-sheet resources and a high pro-forma debt burden, Fitch said in a rating release. Patterson Park ended fiscal 2009 with 0.1% of cash to cover pro forma debt, according to Fitch.
Investors in the bonds will be protected by a memorandum of understanding the charter has with the Baltimore City Public Schools that will allow the bond trustee to intercept the BCPS’s per-pupil allocations to the charter school for the benefit of bondholders.
Additionally, with the bond proceeds, the school will be starting a reserve fund of at least $800,000.
McKennon Shelton & Henn LLP is the bond counsel on the deal and McGuireWoods LLP is representing Patterson Park. Eichner & Norris PLLC is representing the underwriter.
Charter schools that have renewed their charter at least once tend to separate themselves as investment-grade credits, said Greg McKenna, who heads the tax-exempt revenue bond program for PNC Capital Markets LLC. Strong management — people who understand a charter school’s educational and financial needs — is also important, he said.
PNC last week underwrote $15.8 million of bonds for MaST Community Charter School in Philadelphia.
Charter school managers currently face a catch-22 — borrow now amid the favorable contract-bidding environment and low interest rates, or wait “until the income statement can afford those facilities several years from now,” said Yaffa Rattner, managing director at Piper. In a few years, projects “will be more expensive but [schools] will have more students to cover that issue,” she said.
Triple-B credits are getting better funding as investors increase their risk appetites, sources said. This likely will lead to more charter school deals this year.
So far, only institutional investors have shown interest in charter school debt, but it has been “overwhelming interest,” said Shahin Zandfard, senior managing director at PNC.
He said bond insurance has not been an option for charter schools as Assured Guaranty Ltd. and Berkshire Hathaway Inc. have not looked at this sector,
In 2010, charter schools, and triple-B issuers in general, will be “getting better and better funding as the capital markets environment improves,” Zandfard said. “It would only be logical to assume we will see more and more charter schools look at this attractive funding solution as the markets have healed.”