LOS ANGELES — An in-depth study on the credit quality of charter school bonds reported stronger-than-expected financial performance, especially among rated borrowers, and challenged market perceptions about the sector’s financial risk.

The study — Charter School Bond Issuance: A Complete History, Volume 2 — challenges some of the methods used to evaluate charter school finances.

“Charter schools had a surprisingly strong 10.9% median increase in net assets in 2011, despite a difficult budget environment and several years of cutbacks and freezes in per pupil funding for many,” according to Reena Bhatia, vice president of education programs at the Local Initiatives Support Corporation.

The report released last week is the third part in a phased study initiated in 2009 by LISC, a New York City-based nonprofit community development organization, in partnership with the Bill and Melinda Gates Foundation.

Last year’s report focused on the size, scope and pricing for charter school bonds while the current report concentrates on credit characteristics, said Elise Balboni, one of the study’s authors.

Researchers evaluated offering documents, the credit characteristics of charter bond borrowers at the time of issuance, the current financial strength of bond-financed charter schools and repayment performance, Balboni said.

According to Balboni, the charter school sector could be as large a segment of the bond market as health care if standardized disclosure and underwriting criteria were established for borrowers enabling them to access needed capital and lowering the cost of borrowing.

“This could be a large, high-performing market segment,” Balboni said. “But, less than 10% of charter schools are turning to the bond market for financing.”

Even with such a low participation rate, the report said the tax-exempt charter school bond sector had grown to 600 transactions totaling $6.4 billion by May 31.

The report found that a credit-worthy stand-alone school with strong academics, but 400 students, has a harder time accessing the bond market than a mediocre school with 1,000 students, because school size is being used as the primary metric in determining credit.

Pricing also acts as a deterrent. Borrowing costs for charter schools have remained high with pricing spreads over triple-A debt widening to 341 basis points on average since the financial crisis, Balboni said.

In reviewing credit quality, Balboni said her research revealed that a school’s academic strength is a better indicator of credit strength than school size.

“Most defaults have occurred among schools with sub-par academic programs that compared poorly with other schools in their district and state,” Balboni said.

According to the study, the default rate remained relatively low. The study reported no monetary defaults on the 257 charter school bonds with investment grade ratings, one default among the 44 issues with non-investment grade ratings and 21 defaults among the 284 unrated issues. In an evaluation that looked at 22 different financial metrics in the 2011 financial statements for 300 charter school borrowers, the study found their overall financial conditions to be sound and that debt ratios were higher than general market expectations for the sector.

Schools with strong academics attract more students and thus more per pupil funding and are less likely to lose their charter, she said.

Data on academic performance, a better metric for predicting default, is often insufficient in charter offerings or misunderstood by the market, according to the report. The study found that poor academic performance was the primary cause in 73% of defaults by borrowers in the sector, and a likely contributing factor in another 18%.

A handful of underwriters have developed expertise in charter school bonds, Balboni said, but most have not because they don’t consider it worthwhile to develop expertise in a 15-year-old sector in which the average issuance is $20 million.

The study explains methods of evaluating academic performance as part of an overall review of credit quality.

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