SAN FRANCISCO — A charter school in San Diego County will take an investment-grade rating to the market this month as it issues $26 million in debt.
The deal for Escondido Charter High School and the Heritage K-8 Charter School carries a BBB-minus rating from Standard & Poor’s — making it the first rated deal for a charter school in California.
The deal could price next week, said Scott Rolfs, managing director of the church and school financing division of underwriter Ziegler Capital Markets Group.
He said the investment-grade rating reflects the solid track record of Escondido Charter High School, which opened in 1996. Heritage K-8 opened in 2003.
“This is a very, very impressive operation,” Rolfs said. “It’s a big school; it’s been in existence for 10 years.”
The bonds will be issued through the California Municipal Finance Authority, a joint powers authority created to serve as a conduit for bond financing. It describes itself as the lowest-cost issuer of tax-exempt bonds for California nonprofit borrowers.
The obligor is the American Heritage Education Foundation, a nonprofit affiliated with the two schools. As part of the bond transaction, the foundation will gain title to the two schools’ properties and lease them to the schools.
The deal includes $23.4 million in tax-exempt term bonds and $2.1 million in taxable term bonds. There will be no insurance, Rolfs said. Kutak Rock LLP is bond counsel. Peck, Shaffer & Williams LLP is underwriter’s counsel.
The bonds will be sold as a public offering, though limited to qualified institutional buyers, according to Rolfs.
“Our plan is to really take this to the street,” he said.
The new bond issue will finance construction of new facilities while refinancing the schools’ higher-interest debt.
“We’ll actually be paying the same amount we were paying before [in debt service], and we’ll pay our old debt and have a gym, a theater, and a warehouse,” said Dennis “Coach” Snyder, founder and executive director of the schools.
Proceeds will provide $9.7 million for the refunding of privately placed bonds issued in 2001, and also retire about $4.1 million in outstanding bank loans.
The high school and the K-8 school have charters from the Escondido Union High School District and the Escondido Elementary School District, respectively.
The primary source of revenue for the charter schools comes from the per-student state funds that follow each student to the charter school from the district — about $6,200 annually for the high school and $5,700 for elementary students.While some charter schools have uncomfortable relationships with parent districts, it is very different in Escondido, according to Richard Harmon, senior vice president in Ziegler’s church and school financing group.
“The relationship between the sponsoring school district and school is a good relationship. It fills a niche — it is not a competitor,” he said. “This is clearly [a relationship] of cooperation with the school district and well planned and thought out.”
In issuing the investment-grade rating, Standard & Poor’s noted the schools’ history of solid financial positions and adequate cash reserves, steady enrollment trends with facilities at capacity, good historical waiting lists, above-average test scores, and two successful charter renewals for the high school, according to a report prepared by analyst Jane Hudson Ridley.
The high school has an enrollment of greater than 900, while its K-8 sister school has more than 260 students.
About one third of the high school’s students are enrolled in its “traditional classroom program,” in which students attend six class periods per day. The remainder is enrolled in the “individualized learning program,” in which students attend on a flexible schedule based on their specific needs and requirements.
While the traditional program has a 98% student retention rate, the individualized program’s retention rate is about 68%, which is one of the potential credit concerns weighing on the rating, Ridley wrote.
“Should the financial position weaken, or a significant change occur in the school’s enrollment, charter status, or funding — including a change in the per-pupil revenues for ILP students — the rating will be pressured,” she wrote.
Ziegler’s Rolfs said some charter school rules unique to California are probably the reason the debt market for such institutions is less evolved than in other states.
“The reason for that is the length of the charters,” Rolfs said. “California is a state that grants a five-year charter. Because of that, there’s been a little bit of a lag for capital flowing in.”
In neighboring Arizona, for instance, such schools receive 15-year charters, Rolfs said, addressing one of the major credit concerns about charters.
On the other hand, Rolfs said, a long-term charter won’t help a school that doesn’t have a well-crafted, well-executed business plan.
That’s something the Escondido school has demonstrated, he said.
“They’ve really created a wonderful alternative school here for students in the area,” Rolfs said. “Great education, good environment, good academics.”
This year, there are 574 charter schools in California, serving just over 200,000 students, said Gary Larson, spokesman for the California Charter School Association.
That’s about 3% of the state’s 6.3 million public school students, but the charter sector is growing fast, Larson said.
“Last year 84 new charters opened up for the first time,” he said. “We’re seeing about a 20% increase in the number of new schools and students enrolled in them each year.”
