DALLAS — Faced with the borrowing constraints that often hamper growth of charter schools, the Houston area’s Yes Prep Public Schools used a new type of bond financing that has never been done in Texas.
In a $22.1 million deal that closed last week, Yes Prep did a private placement with Capital One Bank using a federal bond program authorized under stimulus legislation to reduce interest costs by several million dollars.
“We are overcoming one of the charter movement’s key challenges: paying for facilities,” said Yes Prep chief executive Chris Barbic.
In most states, including Texas, even though charter schools are public schools, they do not receive facility funding or have taxing authority to raise additional revenue.
To secure the financing, Capital One Bank maximized the use of both qualified zone academy bonds and qualified school construction bonds. The bonds were created under a provision in the federal stimulus bill passed in April 2009. Unlike a traditional 30-year bond, these bonds have a 15-year term, which enables Yes Prep to retire the debt in half the time of many school-bond issues.
With top ratings typically in the triple-B category, the average rate in charter school bond issues is approximately 6.5%, according to financial adviser Drew Masterson of First Southwest Co. Under the terms of the offering structured by Capital One Bank, Yes Prep will receive $22.1 million and pay a net interest rate of less than 1%. The lower rate translates into interest savings of $28 million over the term of the bonds, said Masterson, who also serves on the Yes Prep board of directors.
Masterson said the deal, though the first of its kind in Texas, can be replicated.
“The reason you haven’t seen a lot of these is that there aren’t a lot of investors looking for tax credits,” he said.
Under new provisions approved by Congress last month, the QSCBs became eligible for direct subsidies similar to those of Build America Bonds. However, Masterson said the financing was too far along to reconsider the direct-subsidy option before it was closed.
“That option came, literally, the day we were pricing the bonds,” he said.
Under the financing with Capital One, Yes Prep will pay 2% supplemental coupon. Interest on a sinking fund will earn $5.9 million while the coupon payments will come to $6.6 million, Masterson said, adding that will net out to a true interest cost of 0.67%.
Anne McClellan, chief officer for strategic growth at Yes Prep, said she has received e-mails from other charter schools across the nation asking for more information on how the deal came about.
The deal grew from talks she had with Capital One’s Houston bank after she heard a presentation at a conference. McClellan joined Yes Prep in 2008 after serving as a program officer at the Communities Foundations of Texas, where she helped design and launch 35 Texas science, technology, engineering, and mathematics academies. She was the founding principal of Challenge Early College High, the first early-college high school in Texas, and was also a co-founder of the Center for Reform of School Systems, which focused on the improvement of district and school board governance.
After detailed talks, Capital One officials agreed that the type of financing Yes Prep was seeking dovetailed with its plans to seek new lines of business.
“They reached out to some of their national folks,” McClellan said of the local bankers. “They really brought in their experts on the Community Reinvestment Act.”
“Their understanding of bond purchases, tax-credit projects, and federal resources played a crucial role in helping us develop a facility financing solution that both addressed our needs and pushed our organization forward,” said Joe Greenberg, chair of the Yes Prep Board of Trustees.
Bill Herrington, manager of the South Texas commercial banking group at Capital One, said the bank saw a strong balance sheet, strong management and a strong board, “so we felt very good about the repayment prospects of this particular credit.”
Among the diverse array of charter schools, Yes Prep is considered among the elite in Texas.
With seven campuses, the open-enrollment charter school system serves low-income students in the Houston area. Yes Prep ranked as the best public school in Houston and among the top 100 schools in the nation by Newsweek and U.S. News & World Report.
For the past decade, all of Yes Prep’s graduating seniors have been accepted into four-year colleges and universities, including Harvard, Yale, Columbia, Rice and Stanford. Yes, which stands for “Youth Engaged in Service,” serves 3,500 students in sixth through 12th grade and promotes student achievement and community service.
Last week’s deal was the first in a plan to raise $40 million for new facilities. Typically, Yes Prep takes over commercial buildings or churches and remodels them into schools, McClellan said.
The schools are planning another bond deal in the fall that could result in a similar private placement. Yes Prep could also obtain a credit rating and go the traditional route, Masterson said.
“The first thing you do is go back to the well,” he said. “We’re going to have to do a comparison to see what our best option is.”
The deal was made possible by the Texas Education Agency’s decision last year to set aside $100 million of the state’s more than $538 million of QSCBs for charter schools. The QSCB program provides tax credits to bondholders that are nearly equal to the interest that states and communities would ordinarily pay the holders of taxable bonds. The program does not grant funding. No monetary payments or awards are issued from the state to the school district or charter school.
Another way in which financing may be improved for charter schools is a plan to extend the Texas Permanent School Fund’s bond guarantee to charters. Currently, only taxed-backed bonds issued by school districts are eligible for the enhancement, but Texas lawmakers are drawing up legislation for the 2007 session that could expand the program.
Charter school students account for only about 2.5% of total enrollment in the state, but Texas is among the states most aggressively seeking to expand such schools, which are all public but often use some of the methods of private schools.
Because their ratings are slightly above investment grade at best, charter schools have faced stiff challenges in a risk-averse market in the wake of the recession.
Schools such as Houston’s Yes Prep and the respected Kip Academies are seen as pioneers among charter schools seeking to improve opportunities for lower-income students who might not succeed in traditional school cultures.