DALLAS - Colorado's two largest charter schools this month will sell the first bondissues backed a new state moral obligation pledge that is expected to be rated A byStandard & Poor's.
"Typically, a moral obligation pledge is one notch below a state's GO ratings," saidStandard & Poor's analyst David Hitchcock. "Colorado doesn't have GO debt at the statelevel, but their lease obligations are rated AA-minus with a negative outlook. Itfollows that the moral [obligation] rating would be A with a negative outlook."
The 1,900-student Classical Academy in Colorado Springs and Pinnacle Charter School inFederal Heights, which boasts 1,400 students, will each price deals by the end of themonth that include refunding and new-money components. The Colorado Educational andCultural Facilities Authority will serve as conduit issuer for the debt.
Under a state law approved in 2002 and amended in 2003, Colorado charter schools thatcan achieve investment-grade ratings on their own automatically win the state's moralobligation to repay bond debt in the event of a default.
The moral obligation pledge will back the first $200 million of debt issued byparticipating charter schools and will back new issues or refunding issues, not existingdebt. In the event of a default, the governor is required to ask the General Assembly torepay the debt.
"It's a very strong pledge - it will be interesting to see how it fares in the market,"said Jim Griffin, executive director of the Colorado League of Charter Schools. "If thegovernor has to ask the General Assembly to repay the bonds, that charter school istoast - it ceases to exist. The state or the school district will take it over."
Russ Caldwell, a senior vice president with Kirkpatrick Pettis, said he has had positiveinput from triple-A rated insurers on both issues. Griffin said his office has alsoreceived encouraging feedback from insurers, including a call Friday with MBIA InsuranceCorp.
Of the 29 Colorado charter school bond financings to date, 13 have achieved investment-grade ratings.
"We have $110 million in lower investment-grade charter bonds outstanding today amongthe $210 million issued statewide for 29 schools," Caldwell said. "With 108 charterschools in existence and several others looking at bond financing, I would be surprisedif we didn't consume the state-established $200 million limit on the moral [obligation]pretty soon."
The six-year-old Pinnacle Charter School, the state's second-largest, will undertake abond issue later this month that includes new money and a $12.55 million refundingcomponent. The refunding piece of the deal will take out the school's 2001 maiden issue,a term bond deal that sold with interest rates of 5.25% at the short end and 6% at the2021 final maturity. The deal is rated BBB-minus by Standard & Poor's and Baa3 byMoody's Investors Service. The bonds were underwritten by Stifel Nicolaus & Co.
The new-money component of the upcoming deal will finance the K-12 school's second phaseof construction.
Likewise, the six-year-old Classical Academy, the state's largest charter school, hopesto take on a refunding deal with a new-money component. The school carries a Baa3 ratingfrom Moody's.
"Classical needs a two-year relaxation from its current bondholders to make this work,"Caldwell said. "Classical will either issue $40 million and refund outstanding bonds orwill sell $12 million in parity debt."
Classical's first market venture resulted in the sale of $19.6 million of revenue bondsin 2001. That debt, which was placed largely with U.S. Bancorp Asset Management, soldwith interest ranging from 6.375% on the 2011 coupon up to 7.75% on the 2030 coupon. Thenew-money component of the planned sale will allow the school to complete its secondphase of construction.
