DALLAS — The extension of Texas's triple-A school bond enhancement program to open-enrollment charter school debt is expected to lower borrowing costs and expand their market when the coverage becomes available in February.

"We're happy with the state of Texas," said William Mays, chief financial officer at Uplift Education. "Enhancement from the Permanent School Fund opens up markets for our debt and drives down our costs."

Uplift bonds carry BBB-minus ratings from Standard & Poor's, according to the Municipal Securities Rulemaking Board's EMMA website.

The triple-A wrap from the PSF will lower borrowing costs, Mays said, but the expanded marketplace for charter school debt is just as important.

"There's a finite number of investors who taken the time to understand to understand charter school credit and funding," he said. "When the investors see that guarantee from the state of Texas, it will make a difference."

Uplift has some $180 million of outstanding debt, Mays said, and intends to be back in the market in early 2014. It operates 28 schools in the Dallas-Fort Worth area.

"That ties in well with the state's schedule for opening the program," Mays said. "That worked out nicely."

The PSF guarantee will make charter school debt more attractive to institutional investors, said Wyatt Truscheit, chief financial officer at IDEA Public Schools.

"Charter school bonds with PSF enhancement will be more like a public school district's bonds," he said. "Investors will see that state of Texas guarantee and be assured."

School districts in the state have had general obligation debt guaranteed by the Permanent School Fund since 1985.

The 2011 Legislature extended the coverage to public charter schools with an investment-grade credit rating. Total enhancement available to Texas charter schools is capped at about 5% of the PSF's total available capacity, based on the number of students enrolled in the schools statewide.

The Legislature earlier this year added coverage for refunding debt issued by charter schools. The refunding enhancement total is capped at 50% of the new-money charter school bonds with PSF coverage. Refunding issues must provide present value savings and cannot extend the maturities of the refunded debt.

Federal officials notified the Texas Education Agency in mid-September that the multi-billion fund could cover charter schools' revenue debt.

The agency currently is developing the procedures for public charter school operators to tap into the enhancement program. The State Board of Education must approve the final rules.

The education agency, which oversees the state bond enhancement program, and several state lawmakers asked U.S. Treasury and Internal Revenue Service in October 2011 to amend federal tax regulations limiting the coverage to organizations with taxing powers, which school districts have but charter schools do not.

Like Mays, Truscheit said he was surprised the IRS completed its ruling in less than two years.

"We learned about the decision a day after we took $63 million of bonds to market," he said. "It wouldn't have mattered, because we could not have waited."

IDEA has 30 campuses in central Texas and the Rio Grande Valley, Truscheit said, and expects to have 36 within a year.

"We're already strategizing how to apply for the PSF coverage," he said. "Not only will it save us in borrowing costs, but we expect to lower our issuing costs as well."

The $25.5 billion Permanent School Fund has a total coverage capacity of $76.7 billion, of which $55.2 billion is currently taken. There is $16.7 billion of available capacity and a reserve capacity of $3.8 billion.

The state guarantee extends to 2,790 outstanding issues. The program has enhanced a total of $112 billion of Texas public school bonds since it began in 1985.

Texas public school debt totals $63.6 billion.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.