Reflecting the increased acceptance and maturity of charter schools throughout the nation, in 2013 a relatively large amount of new bond financing of charter school facilities has come to the market with public credit ratings. Of the roughly $272 million of new-issue bond activity during the first three months of 2013, nearly 90% were sold with public ratings.
As Table 1 illustrates, recent new-issue activity reflects diversity in both charter schools and issuance characteristics.
• These deals priced at a wide range of yields: from 4.10% to 6.75%, with one deal coming to market at 10%.
• Spreads at pricing ranged from 156 basis points to 923 basis points over a benchmark Aaa scale, with an average spread of 316 basis points.
• The median years of school operation is 10 years. The two schools with little or no tenure were unrated.
• Generally, the higher the enrollment, the lower the yield.
• The median issue size is almost $12 million, with a range of $2.5 million to $45 million.
Publicly Rated Charter School Debt
The charter schools with publicly rated debt generally reflect favorable characteristics including established operations of 5 to 15 years, enrollment of 500 to 7,500 students, good student demand and meeting academic standards. Most have achieved at least one charter renewal. These schools typically have demonstrated adequate financial results, given the inherent weakness of being almost wholly dependent on state aid to support their operations.
A number of these charter schools have multiple locations, and some have a niche specialty that drives demand. Most cover grades K through 8 or higher. Along with stable to increasing enrollment, these established schools have waiting lists to draw on. Some are managed by professional education groups.
The schools are geographically dispersed among fast-growing states like Arizona and Colorado as well as more mature states like Michigan and Minnesota (see Table 2). All these states have a long history of charter school acceptance.
Growing Charter School Sector Source
The number of charter schools in the U.S. more than tripled between 2000 and 2011. However, schools with publicly rated debt make up only about 3% of the estimated 5,600 charter schools nationally. Generally, less established charter schools with smaller enrollments tap the unrated debt market, while schools that seek a debt rating usually wait until their operations are strong enough to qualify for a high speculative grade to investment-grade rating. This appears to result in a preponderance of B to BBB public ratings for this sector.
S&P rates approximately 149 charter schools with $2 billion of debt. As of June 2012, about three quarters were rated BBB-minus to BBB.
In March 2013, Fitch lowered ratings on 19 of the 28 schools comprising its estimated $400 million portfolio. The average rating of its portfolio went from BBB-/BBB to BB/BB+. The lower average ratings reflect Fitch’s changed rating criteria announced in 2012. In April, S&P lowered its rating on Idaho Housing & Finance Associations revenue bonds issued for the North Star Charter School Inc. to CCC-minus from B and placed them on negative watch.
S&P cited recent deterioration of the charter school’s operations and cash balance, worse-than-expected fiscal 2012 results placing the school in violation of financial covenants, and increased risk that the school may lose its authorization after receiving a “letter of defect” from the charter authorizer, the Meridian School District.
Charter schools have inherent weaknesses that can preclude a higher credit standing.
The bond maturity usually exceeds the length of the existing charter. Lacking taxing authority to diversify their revenue base, the school operators are highly dependent on the state for revenue.
State educational formulas are driven by per capita enrollment, making a school’s ability to attract and retain students a key determinant of financial performance. At the same time, schools are vulnerable to states reducing per student education aid to address their own budget shortfalls. Given limited resources, financial margins and liquidity are usually modest and reflect limited amounts of unrestricted cash.
In addition to limited financial flexibility, charter schools are generally burdened with high debt levels. Annual debt service costs can absorb up to 20% or more of a school’s budgeted revenues.