DALLAS — Harmony Public Schools, the largest charter school operator in Texas, will refund $104 million of triple-B bonds to secure the state's triple-A guarantee, an enhancement that just became available this year.
The bonds, expected to price Tuesday through negotiation with Raymond James and Jefferies, will be the third charter school issue this year backed by the Texas Permanent School Fund. Until this year, the PSF guaranteed only bonds issued by traditional public school districts.
Wells Nelson and Associates serves as financial advisor, with the law firm of Andrews Kurth as bond counsel. Andrews Kurth partner Thomas Sage has worked on all three of the PSF charter school deals this year. Sage has worked on a number of school finance deals for traditional districts and is considered an expert on the PSF guarantee.
The 2014 issue will refund 2007 and 2008 revenue bonds issued through the Texas Public Finance Authority Charter School Finance Corp.
New money from the issue will finance schools or additions in Austin, Houston, Laredo, San Antonio and Waco. The operator also plans to issue another $8 million of bonds in the coming year for the Laredo school.
Coming to market through Houston Higher Education Finance Corp., the bonds carry only one rating from Standard & Poor's.
"Constraining the rating is an elevated pro forma debt burden as well as general credit risks associated with all charter schools, such as the need for multiple charter renewals over the life of the bonds," wrote S&P analysts Luke Gildner and Karl Propst in their June 25 ratings report. "Furthermore, the rating is dependent on Harmony's ability to hit projections; a significant miss of projections could result in a negative rating action."
The Texas Education Agency that administers the PSF initially declined to cover the bonds because one of the Harmony districts in Lubbock failed to meet the state's academic ratings, according to the preliminary official statement.
To qualify, the company had to agree "to return such charter districts effective July 1, 2014."
A spokeswoman confirmed that Harmony is the largest charter operator in Texas but did not return phone calls seeking further information on the deal.
With the state bearing all the risk, the bonds should appeal to a wide range of investors, particularly those seeking higher yields on a solid security, said Jeffrey Timlin, lead portfolio manager and principal at Sage Advisory Services in Austin.
Timlin expects the bonds to price 30 to 40 basis points above the Municipal Market Data yield curve for triple-A debt.
"The PSF backing is going to take away a lot of concern," he said. "Because of the structure of the enhancement, even if this charter school defaults there is a pretty significant credit backing for this particular paper."
After this deal, Harmony Public Schools will have about $290 million in long-term debt outstanding. The 2014 issuance will be used to refinance existing bonds totaling $54.03 million. Another $50 million in new money will be used to expand existing campuses in Austin, Laredo, Carrollton, Fort Worth, Houston, Odessa, Beaumont, and Garland.
The bonds come under a master trust indenture and are secured by a deed of trust, all trustee-held funds balances, and all revenues of Harmony Public Schools.
"The stable outlook reflects our anticipation that the school will continue to increase enrollment as projected, maintain financial operations that are sufficient to cover maximum annual debt service by more than 1.3-times, and maintain liquidity at approximately 65 days' cash on hand," the S&P analysts wrote.
"Any unexpected events causing the school to miss projections resulting in deterioration in financial operations or the balance sheet would likely result in a negative rating action," they added. "We believe that Harmony Public Schools is at its debt capacity for the rating level, therefore a positive rating action is unlikely during the outlook period. However, we would view increases in liquidity and debt service coverage as positive rating factors."
Among the risk factors listed in the POS is "negative publicity" related to the school's Turkish foundations and oft-disavowed ties to the so-called "Gulen Movement."
Based on the teachings of Turkish Islamic scholar and spiritual leader Fethullah Gulen, the movement is active internationally in education. Adherents call the philosophy "Hizmet," meaning "The Service," or "Cemaat" for "Community."
Estimates of the number of schools and educational institutions vary widely, from about 300 schools in Turkey to over 1,000 schools worldwide, according to various media reports.
Despite the fact that Harmony Schools often teach about Turkish culture and language, the school says connections to Gulen are mistaken.
The charter operator "does not teach religion in its charter schools, is not affiliated with the Gulen movement and does not require that its employees contribute to the Gulen movement," according to the POS.
Harmony has also fended off criticisms in Texas that it is using an inordinate number of teachers from Turkey.
"While the Borrower has brought in foreign workers to teach at its schools, it has done so as a result of difficulty in finding qualified teachers in math, science and computer science," the POS states. "Additionally, over time, the percentage of foreign workers has steadily declined."
The foreign teacher ratio has fallen from 20% in 2011 to 8.4% in 2013, the POS says.
The concept for the school was developed by University of Texas professor Yetkin Yildrim, a native of Turkey, and his Turkish associate Soner Tarim in 1996. Erdal Caglar is chief financial officer for the district. The first school opened in Houston in 2000.
Under Tarim's guidance as superintendent, Harmony has grown to 36 schools and 20,000 students in Texas, many of which have been recognized as academically competitive schools in the nation. Tarim holds a Ph.D. from Texas A&M University and is a trained biologist and ecologist.
Yildrim and Soner have said they started Harmony because they found public school teaching of math and science in Texas deficient.
The schools, distinguished by their eye-catching architecture and state-of-the-art facilities, focus heavily on math and science.
Construction of the schools has also received scrutiny, particularly in a June 6, 2011 article in The New York Times.
"Records show that virtually all recent construction and renovation work has been done by Turkish-owned contractors," according to the Times article. "Several established local companies said they had lost out even after bidding several hundred thousand dollars lower."
In a written response to the Times article, Harmony said that it did not discriminate against contractors or vendors on nationality or other personal factors.
The company points to its academic achievements to counter criticisms leveled in the press.
Of the 38 campuses, 37 Harmony schools have achieved TEA's top rating of "met standards" and 15 campuses have received at least two distinctions. The schools were among 16 winners of the U.S. Department of Education's $30 million "Race to the Top" district award supporting preparation of students for college and careers through enhanced teacher effectiveness, personalized learning, and achievement programs.
Since the first school launched in Houston, the company has opened additional campuses in 12 other cities across the state, including Dallas, Austin, El Paso, Fort Worth, San Antonio, and Waco.
Combined enrollment for all Harmony Schools has grown to more than 25,900 students for the current academic year from 200 students at inception in 2001. Wait lists total more than 40,700 students, and the current wait list at most of the campuses exceeds its total enrollment.
Planned expansions will add another eight campuses during the next three years, according to school officials, which will result in 48 total campus locations.
Harmony is also reconfiguring its schools in certain markets, such as Houston, Dallas, and Austin, to create a feeder school system to boost student retention and to foster more advanced placement courses.
The 3-2-1 feeder system consists of three kindergarten through 5th grade schools that feed into two middle schools that feed into one 450- to 500-student high school.
Harmony Public Schools formally changed its name from Cosmos Foundation in 2012. The company renewed eight charters in 2013 and will have two charters up for renewal in 2015.
"To date there have been no cases in which a Harmony charter renewal has been denied," analysts wrote. "Standard & Poor's does not expect any issue with the charter renewals in 2015."
