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Welcome to Todays Web Seminar!

June 5, 2013 12:00 PM ET/9:00 AM PT

Presented by:

Hosted By:

Michael Stanton is the publisher of The Bond

Buyer, the daily newspaper of municipal finance with more than 15,000 readers nationwide. In this position, he supervises all operations at the newspaper, including the newsroom, advertising and circulation sales, and an active conferences division that produces more than 10 events on hot topics in municipal finance each year. Prior to being named publisher in late 2005, he was the program manager for The Bond Buyer Conferences, and earlier served in several positions in the newsroom, including Editor-in-Chief from 1999 through 2000. He is a graduate of Columbia University and received an MBA from Harvard Business School.

SourceMedia, Inc. is pleased to be able to offer CPE for this web session. It is imperative that you adhere to the following instructions to obtain CPE credit.
1. To receive the credit, you must be in attendance for the complete session. BondBuyer is not responsible for late arrivals or connections issues. 2. There will be polling questions asked periodically, all of which you must answer. 3. Qualified attendees will receive Evaluation forms from Susan Korcynski within 3business days of this web seminar. 4. Complete the Evaluation form, keep a copy for yourself and email to or fax to (646) 264-6830. 5. Once the evaluation form is received your CPE certificate will be emailed to you within 5-business days from time of arrival. Please note that Evaluation Forms and CPE Certificates will ONLY be sent to those attendees who stayed for the entire session and answered all polling questions.

SourceMedia Inc. is registered with the National Association of State Boards of Accountancy (NA SBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Nashville, TN, 37219-2417 or by visiting the web site:

California and New York MCLE Credit Available

To qualify:
Download the form from the recap email Complete the form, and enter code provided Follow the instructions on the form to return to Melissa Woods at Orrick

Polling #1

William Wildman, Director

Canada Capital Markets (RBCCM)

Royal Bank of

Mr. Wildman has over 30 years experience in municipal finance having served as senior manager on over $12 billion in transactions. His areas of concentration include charter schools, affordable housing, and infrastructure finance. Since completing the nations first investment-grade charter school transaction in 2000, the RBCCM charter school group has senior managed over $1,300,000,000 in charter school transactions in 14 states. In 2010 two deals that Bill managed won regional Bond Buyer Deal of the Year Awards, the first time charter schools were so honored. The $67,000,000 KIPP Houston deal was voted Southwest Deal of the Year and the $12,000,000 High Tech High was voted Far West Deal of the Year. In 2011, Bill managed a $22,000,000 transaction for the Alliance for College-Ready Public Schools that enabled the Alliance to pre-pay two New Market Tax Credit CDE loans and deploy the proceeds to two new construction projects.

Reena Bhatia is Vice President of Education Programs at

Local Initiatives Support Corporation. She spent the majority of her finance career with Prudential, structuring non-traditional social investments, including those for charter schools, for Prudential Financial's Social Investment Group and serving as a researcher in Prudential Securities' Equity Research Department. She also worked for the KIPP Foundation, first as part of its national Real Estate Group and then as Financial Manager for TEAM Academy Charter School. While completing her M.B.A. at New York University, Reena was selected as a Broad Resident in Urban Education, serving as a summer resident with the San Francisco Unified School District. She holds a B.S. in Finance from Rutgers College and an M.B.A. from New York University.

Wendy Berry has an extensive background in municipal

credit analysis and currently specializes in the charter school sector. Her background includes 17 years at Moodys Investors Service where she had various specialties throughout her tenure including housing, higher education, and tax increment financing. She also spent three years as an investment banker where she executed numerous education-related financings, including colleges and charter schools. While at Jefferies, she authored the first comprehensive bond report on charter school bonds entitled Analysis of the Charter School Bond Market. Wendys currently serves in multiple consulting roles that include: assisting the Brighter Choice Foundation with facility financing needs for its network of charter schools; working with LISC conducting research on the charter school sector (for which she coauthored the 2011 and 2012 publications Charter School Bond Issuance: A Complete History, Volume I and II), and as a municipal credit analyst consultant for Savader Asset Advisors.

Eugene Clark-Herrera, a partner in Orrick's

Public Finance Group, focuses his practice on financing for school and college facilities, as well as city and county facilities and infrastructure. His practice includes serving as bond and disclosure counsel on revenue and tax-supported bond financing involving charter schools, counties, cities, school and college districts, airports, and student and multi-family housing projects. Mr. Clark-Herrera has experience with a variety of financing structures and characteristics, including pension obligation bonds, synthetic fixed rate bonds, and various reinvestment vehicles.

Successful Investing In Charter School Bonds: Finding Best Practices in a High-Yielding Sector

Presenters: Eugene H. Clark-Herrera, Orrick William Wildman, RBC Capital Markets Reena Bhatia, Local Initiatives Support Corporation Wendy Berry, Local Initiatives Support Corporation
June 5, 2013

Part I Credit Considerations and Market Trends


Charter Public Schools and District Public Schools

Both charter schools and district schools are public K-12 schools that rely primarily on governmental payments and tax revenues for operational and facilities funding. In the case of charter schools, the primary source of funding is a state or district per-pupil payment. Payments are not vouchers but follow the student to the specific school he or she attends. Neither district schools nor charter schools charge tuition; however, both may benefit from contributions, donations, and user fees in addition to governmental payments. District or traditional schools are operated by governmental entities such as school districts, cities, or counties. Charter schools may be operated by districts, nonprofit corporations, private non-governmental entities and quasi-governmental institutions. As public schools, both district and charter schools are subject to the requirements of state education codes and federal regulations.


Creation and Oversight of Charter Schools

Each state has its own charter law that outlines the terms and conditions for the creation, management and operation of charter schools. Charter schools are created through a charter issued by a charter authorizer. The charter is a contract between the authorizer and the charter school setting out the terms and conditions under which the school may operate. The qualifications to become an authorizer are established by state law and vary from state to state. Authorizers include state agencies, state boards, colleges and universities, school districts, cities, counties, tribal governments and a variety of nonprofit or quasigovernmental organizations.

Authorizers vary widely in terms of expertise, staffing and oversight capabilities.

Charters are issued for a period of time ranging from three to twenty years. Charters require renewal on a periodic basis. Charters may be revoked or fail to be renewed by an authorizer based on criteria outlined in the state law and the specific charter contract.


Charter and District Facilities

District schools operate in easily recognizable elementary, middle and high school facilities generally characterized by large sites, substantial play areas, gymnasiums, auditoriums, large classrooms and administrative offices. District school facilities are typically funded by bonds secured by property tax or other dedicated revenues and are not tied specifically to per-pupil payments or academic performance Charter schools operate in a variety of facilities ranging from converted district facilities to renovated commercial buildings, strip malls, free-standing new construction and other sites. In most cases, charter schools lack the type of physical plants characteristic of district schools.

While a small percentage of charter facilities are funded in the same manner as district facilities, in most cases, bond and lease facility payments are tied specifically to per-pupil payments and are funded out of a portion of the per-pupil payment.
State per-pupil payments vary widely from state to state both in process and in amount. In some cases payments are made directly to the school, in others they go through an intermediary. For example, in Washington DC, per-pupil payments are in excess of $13,000 per/student while in California payments are in the range of $6,000/student.

Charter Management Structures (CMO, EMO or Stand-Alone)

Charter and Educational Management Organizations (CMO and EMO) are characterized by a system of schools all of which employ similar curriculum, financial and administrative components. In some CMOs schools are operated by a single entity that holds the charters. In other cases, schools are community organizations with independent boards and charters that contract with a management company to provide various services. In certain cases, a CMO may hold a single charter but operate multiple campuses. In other cases, each campus is a separate nonprofit corporation with its own charter. In cases in which there are multiple corporations and charters, state law may restrict the ability of one school to provide financial support to another school. CMOs may operate in one state or jurisdiction or in multiple states or jurisdictions. CMOs generally employ a management or service agreement that outlines the services that they provide. They typically charge a management fee for these services. In some but not all cases, CMOs provide financial support to individual. schools. Individual or stand-alone schools are generally limited to one campus or one charter with one or more campuses within a single jurisdiction.

Ownership and Borrower Structures

Facilities may be owned by a single entity that owns and operates facilities (CMO or Stand-Alone). In this model, the operator and the owner/borrower are the same.
Increasingly, many CMOs and stand-alone charters have adopted a model that separates ownership of the facility from operation of the school. In this model, the operator and charter holder is typically a nonprofit corporation. The borrower or owner of the facility is typically a separate nonprofit corporation affiliated with the operating entity. In cases in which there are multiple campuses or schools, the nonprofit borrower may create a series of LLCs, single-purpose bankruptcy remote entities, the sole member of which is a nonprofit corporation.

In this model, the operating entity (Lessee) enters into long-term leases with the separate nonprofit or LLC (Borrower) and makes lease payments to the Borrower/Lessor.
This structure not only reduces the liability of the operator, but allows the operator to manage schools in multiple jurisdictions. In some states, such as California, lessees receive higher per-pupil payments than do operator/owners.


Factors in Credit Analysis

Unlike tax-supported debt, charter school bonds rely primarily on the ability of the school to attract and retain students in order to service debt. In that regard, charter schools resemble businesses more than they do governmental entities. Charter school facilities are special purpose facilities, suited primarily for the operation of educational institutions. Unlike apartments and commercial real estate, charter facilities may have limited market value for uses other than as schools. In this regard, the value of a mortgage is secondary to the ability of the borrower to access cash flow from the operations of the school. From a structural perspective, features such as senior lien on unrestricted revenues, direct intercept of state aid payments (if available), and adequate reserves are to strengthen the security and sources of payment. Credit analysis is concerned with an assessment of the ability of the school to maintain operations for the life of the bonds, as well as use of a security structure that assures the investor that, so long as the school operates, the trustee has the legal tools necessary to capture debt service payments on a priority basis. Because of the variation of ownership and borrower structures, the borrower may have limited assets and restricted revenues. In this case, the primary credit is the credit of the operator/lessee (i.e., the school), not the borrower.


Financial Covenants
Depending on the ownership and borrower structure, financial covenants may be included in either the loan agreement (operator and borrower) or in the lease (LLC or separate borrower). Typical financial covenants include:

Limitation on Additional Parity Debt or Disposition of Assets: 1.20X to 1.25X existing and proposed debt based on previous years audit and projected debt service Debt Service Coverage equal to 1.10X Maximum Annual Debt Service tested on an annual (audit) basis

Liquidity equal to 45 days cash on hand or similar liquidity measure tested on an annual basis
In CMO structures, subordination of management fees to debt service payment on the bonds or base rent payments Restrictions on subordinate and short-term debt Requirement that failure to meet the coverage and liquidity tests results in the engagement of an independent financial consultant who will develop a plan to remedy the failure

Factors in Credit Analysis

Strength of the State Charter Law Amount and Regularity of State Aid Payments Experience and Oversight Capacity of the Authorizer

Demand for Educational Services

Academic Performance of the School Financial Performance of the School Qualifications of Board of Directors, Management and Faculty Student and Teacher Retention Rates Ownership and Document Structure


Demand and Academic Performance Factors

Academic performance as measured by some standardized tests Academic performance as compared to competing district and charter schools Annual increase in academic performance by grade level Provision of specialized curricula related to math, science, arts, etc. Graduation and college-acceptance rates Socio-economic factors within the service area (free and reduced lunch percentage, crime, etc.)

Waiting lists
Student Retention Rates Teacher Retention Rates


Financial Performance Factors

Ongoing fund balances and operating surpluses Liquidity as measured by cash-on-hand and other measures Stability of operating history Fiscal policies related to insurance, long-range facilities planning, fund balance policies and fiscal goals and reserves Contingency plans addressing reduced or delayed state aid payments Annual financial performance as reflected in the audits

Established cash management policies

Historic and projected fund-raising and donations as a percentage of operating revenues


Continuing Disclosure
In many cases, the borrower and the operator are separate entities. In some cases, teachers, administrators and faculty may be employees of the CMO; in other cases, they may be employees of the individual school. The definition of obligated persons may include the borrower, the school, the CMO or other affiliated entities. Typically, disclosure includes:
Annual Financial Information
Quarterly Information Operating Data


RBC Capital Markets, LLC (RBC CM) is providing the information contained in this document for discussion purposes only and not in connection with RBC CM serving as Underwriter, Investment Banker, municipal advisor, financial advisor or fiduciary to a financial transaction participant or any other person or entity. RBC CM will not have any duties or liability to any person or entity in connection with the information being provided herein. The information provided is not intended to be and should not be construed as advice within the mea ning of Section 15B of the Securities Exchange Act of 1934. The financial transaction participant should consult with its own legal, accounting, tax, financial and other advisors, as applicable, to the extent it deems appropriate. This presentation was prepared exclusively for the benefit of and internal use by the recipient for the purpose of considering the transaction or transactions contemplated herein. This presentation is confidential and proprietary to RBC Capital Markets, LLC (RBC CM) a nd may not be disclosed, reproduced, distributed or used for any other purpose by the recipient without RBCCMs express written consent. By acceptance of these materials, and notwithstanding any other express or implied agreement, arrangement, or understanding to the contrary, RBC CM, its affiliates and the recipient agree that the recipient (and its employees, representatives, and other agents) may disclose to any and all persons, without limitation of any kind from the commencement of discussions, the tax treatment, structure or strategy of the transaction and any fact that may be relevant to understanding such treatment, structure or strategy, and all materials of any kind (including opinions or other tax analyses) that are provided to the recipient relating to such tax treatment, structure, or strategy. The information and any analyses contained in this presentation are taken from, or based upon, information obtained from the recipient or from publicly available sources, the completeness and accuracy of which has not been independently verified, and cannot be assured by RBC CM. The information and any analyses in these materials reflect prevailing conditions and RBC CMs views as of this date, all of which are subject to change. To the extent projections and financial analyses are set forth herein, they may be based on estimated financial performance prepared by or in consultation with the recipient and are intended only to suggest reasonable ranges of results. The printed presentation is incomplete without reference to the oral presentation or other written materials that supplement it. IRS Circular 230 Disclosure: RBC CM and its affiliates do not provide tax advice and nothing contained herein should be construed as tax advice. Any discussion of U.S. tax matters contained herein (including any attachments) (i) was not intended or written to be used, and cannot be used, by you for the purpose of avoiding tax penalties; and (ii) was written in connection with the promotion or marketing of the matters addressed herein. Accordingly, you should seek advice based upon your particular circumstances from an independent tax advisor.


Part II Legal Issues


State Law Differences

Basic Legal Structure for Charter Bond Financing

Variations on the Theme


State Law Differences

43 states permit the formation and operation of charter schools under statutory schemes that are fundamentally similar in purpose, though often differing in ways that are relevant to bond financing.

States that have charter school laws:

Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Louisiana Maine Massachusetts Michigan Minnesota Mississippi Missouri Nevada New Hampshire New Jersey New Mexico New York North Carolina Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina Tennessee Texas Utah Virginia Washington Wisconsin Wyoming

District of Columbia Maryland


State Law Differences

Charter Authorization
Charter schools are formed by the approval of the schools constitutional document called a charter or contract. Charters are approved by authorizers which may be governmental entities, such as the state board of education, state university system, local governments or local school districts, or by quasi-governmental or nongovernmental entities. In New York, only two governmental authorizers exist for the 300+ charter schools in the state. In Ohio nearly 70 authorizers include private nonprofit corporations, universities and quasi-governmental entities for over 350 charter schools. In California each of the over 1000 school districts has power to authorize charters, and over 1000 charter schools are operating in the 2012-13 year.


State Law Differences

Organization and Independence
Charter schools may be formed as nonprofit corporations, for-profit corporations, unincorporated associations, limited liability companies or cooperatives, depending on local law. Control of the charter schools governing board may be autonomous, controlled entirely by the authorizer, or some combination thereof, depending on local law. In California, charters may, but arent required to, be established as nonprofit corporations and can exist instead as quasi-governmental entities with no specific corporate character. In Nevada, charter schools may not be established as nonprofit corporations, and must exist as quasi-governmental entities. In Ohio and Texas, the law provides for independent charter school boards for some schools, but not others. Statutory independence of the board can affect a range of operational concerns such as employee eligibility for public pensions, collective bargaining rules, and federal tax status.

State Law Differences

Corporate Powers
Ordinary powers of a private corporation may be granted to charter schools entirely, or only in part or subject to statutory limitations, depending on local law.

In states where charter schools may be organized as nonprofit corporations under local laws, the typical powers of a nonprofit corporation are granted to charter schools, including the power to own or lease property and enter into contracts. In states where charters are organized as associations, cooperatives or quasi-governmental entities, the scope of the charter schools corporate powers may be unclear (unless specifically outlined in law).
Texas, New Mexico, Nevada and California are examples of states that either require or permit charter schools to be formed as entities other than nonprofit corporations.


State Law Differences

Charter Revocation
Each states charter school law describes the conditions under which a charter may be unilaterally nullified or revoked by its authorizer. Certain states, such as Arkansas, impose a high degree of objectivity and clearly defined criteria upon the revocation process, and some allow for automatic revocation upon the occurrence of certain extraordinary conditions (e.g., misconduct, fraud, chronically low test scores, etc). Other states permit a high degree of subjectivity in the revocation process, or provide little definition of the criteria or conditions justifying revocation. Some states, such as Colorado and California, maintain revocation appeals procedures that mirror or simulate constitutional due process procedures, while other states have no appeals process at all. Finally, in states with multiple charter authorizers, schools may be able to avoid revocation by simply shopping for a new authorizer without addressing the conditions that gave rise to the original revocation process.


State Law Differences

Charter School Funding
Charter schools are almost uniformly funded based on attendance, from the same public money that funds traditional K-12 school districts. The perpupil funding may vary in amount, however, from the level provided to traditional public schools. Certain states, such as the District of Columbia and California, augment charter school operating funds with separate per-pupil funding specifically available for facilities expenses. Charter school funding may typically be pledged to secure indebtedness, pursuant to corporate powers of the school; however, certain states, such as New York, specifically prohibit any security interest in charter school funds. Other states, such as Arizona and California, permit charter school funds to be intercepted before disbursement to the charter school, for direct transfer to a bond trustee as security for bond repayment.


Basic Legal Structure for Charter Bond Financing


Exemplar Transactions
Bronx Charter School for Excellence (Bronx, NY) (2013)


Bonds issued to finance acquisition, construction and renovation of facilities. Charter school entity is the borrower. Senior lien on financed facility given to bond trustee. Track record of school garners BBB- rating.


Pledge of schools per-pupil revenues not permitted under New York law,
and no intercept of funds available.


Exemplar Transactions
Rocketship Alma Academy (San Jose, CA) (2011)


Bonds issued to refinance construction loan and finance additional project


Borrower (landlord) is limited liability company (LLC) sole member of which is

nonprofit corporation controlled by the CMO.

Borrower complies with financial covenants in loan agreement. Charter school (tenant) complies with financial covenants in lease agreement.


Borrower (LLC) may pledge revenues (rental receipts) to bond trustee. Liquidity and coverage covenants require charter school to maintain cash and
balance sheet, but CA rent reimbursement law creates disincentive to pledge charter school revenues.


Exemplar Transactions
Aspire Public Schools (multiple cities, CA) (2010)


Bonds issued to acquire and construct charter school facilities. Nonprofit borrower/landlord uses operating leases to schools (short terms
with renewals).

Multiple properties/leases secure bond repayment, with ability of

landlord/borrower to adjust Additional Rent to capture payments from one school to cover shortfall of another, if needed.


California law limits power of charter school A to pay obligations of charter

school B, but special purpose entity landlord may comingle rental revenues from multiple tenants to pay bonds.


Exemplar Transactions
New Plan Learning (Dayton and Lorraine, OH; Chicago, IL) (2011)


Bonds issued to finance acquisition, construction of facilities and refinance

existing debt.

Leases from multiple landlord entities (commonly controlled) to multiple

charter schools, landlords own property and improvements.

Landlord entities pool property and revenues to secure single obligation. Borrower is obligated group representative, but repayment is joint/several
obligation of entire group.


Neither Ohio nor Illinois laws permit intercept of school revenues. Financial covenants embedded in school leases as well as borrower


Exemplar transactions
Tri-Valley Learning Corporation (Livermore, CA) (2012)


Bonds issued to finance tenant improvements, including construction and

renovation of facilities on leased property.

Charter school is tenant and borrower. Payments to ground lessor subordinate to bond debt service.


California law permits intercept of bond debt service payments(as schools

rental payments) directly from state controller to bond trustee.

Intercreditor agreement controls exercise of remedies by bondholders and

landlord against charter school borrower/tenant.


Part III Charter School Bond Issuance: A Complete History


Local Initiatives Support Corporation (LISC)

LISC helps community residents transform distressed neighborhoods into healthy and sustainable communities of choice and opportunity. National organization with a community focus:


31 local offices across the country $12 billion in community development capital since 1980 289,000 affordable homes 46 million square feet of retail, community and educational space 169 schools for 68,000 students $33.9 billion in total development

LISC is Building Sustainable Communities by achieving five goals:

Expanding Investment in Housing and Other Real Estate Increasing Family Income and Wealth Stimulating Economic Development Supporting Healthy Environments and Lifestyles Improving Access to Quality Education

Genesis of Research

In 2009, the Bill & Melinda Gates Foundation made a three-year grant to LISC in conjunction with a $30 million program-related investment for charter school facility bond issuance in the Houston market. As part of its grant responsibilities, LISC has researched data on charter school bond issuance in order to foster market development.

LISC conducted the first phase of its research on rated charter school bond issuance through year-end 2009, which it published as part of its 2010 Charter School Facility Finance Landscape.
LISC published Charter School Bond Issuance: A Complete History as the second phase of its research, focusing on cost and pricing variables for both rated and unrated charter school bond transactions through year-end 2010. This year, LISC completed the third and final phase of its research with the second volume of A Complete History, updated with issuance through May 2012. This volume will focus on underwriting best practices and the credit characteristics of charter school borrowers.


Polling Question #2


Charter School Bond Issuance

Market Overview


Annual Issuance
Issuance Status by Year
(Par Amount in $ Millions)


Analysis of Outstanding Issues

Financial Measures


2011 Financial Statement Disclosure

306 of the charter school borrowers had sufficient financial information. The remaining either had insufficient information or were not required to disclose.


2011 Bond Debt Service Coverage

The vast majority of outstanding bonds had healthy debt service coverage in FY 2011.1 The median stood at 1.45x, while MADS was 1.37x. . Bond DSCR by Par Amount Outstanding
($ in Millions)
3.00x+ 2.00x - 2.99x 1.60x - 1.99x 1.40x - 1.59x 1.20x -1.39x 1.00x - 1.19x <1.00x $0 $100 $200 $300 $385 $400 $500 Rated $600 All $700 $800 $900 $1,000 $456 $580 $566 $536 $791 $868


Excludes capital expenditures


2011 Debt Burden

68% of the par amount outstanding had a debt burden of less than 15% while 39% had a burden less than 10%. The median was 12.6%.

Debt Burden by Par Amount Outstanding

($ in Millions)
Less than 5% 5% - 9.9% 10% - 11.9% 12% - 14.9% 15% - 19.9% 20%+ $0 $200 $374 $268 $923 $971 $313

($ in Millions)


$600 Unrated

$800 Rated

$1,000 All





Other Financial Metrics Captured in Analysis

Balance Sheet Metrics
Bonds Outstanding
Debt Outstanding Cash & Investments Cash & Investments, Net of DSRF Unrestricted Cash & Investments Change in Unrestricted Cash & Investments

Operating Metrics
Total Revenue
Total Expenses Bond Debt Service Paid Total Debt Service Paid Capital Expenditures Depreciation

DCOH, All Cash & Investments

DCOH, Net of DSRF DCOH, Unrestricted Total Assets

Net Income, Excluding Capital

Net Income, Including Capital Debt Burden Expenses per Day

Governmental Fund Balance, if applicable

Change in Governmental Fund Balance

Increase in Total Assets

% Change in Total Assets


Analysis of Outstanding Issues

Underwriting Best Practices


Academic Disclosure at Issuance

We analyzed the offering documents for the outstanding issues and tallied the type of academic data provided for each. Raw Academic Data
Authorizer Report Multi-Year Disaggregate State Multi-Year Aggregage State Single-Year Disaggregate State Single-Year Aggregate State Other Tests/AYP Results District Comparable State Comparable Other Schools Comparable No Academic Information 0 50 60 64 100 150 200 250 186 215 8 223 21 125 6 128


Academic Disclosure
We weighted the academic components based on their usefulness in assessing school quality and calculated a metric for each offering based on those weights.

Academic Metric Distribution

Academic Data Authorizer Report Multi-Year Disaggregate State Multi-Year Aggregage State Single-Year Disaggregate State Single-Year Aggregate State Other Tests/AYP Results District Comparable State Comparable Other Schools Comparable

Weight 3 3 2 2 1 1 1 1 1


Academic Disclosure
After the sectors earliest years, academic disclosure appears negatively correlated with ease of market access, with disclosure increasing in more difficult markets. Average Academic Metric by Year
5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0.83 3.31 3.63 4.44 4.10 3.47 3.37 4.13 4.13 3.58 3.92


Analysis of Outstanding Issues

Comparison of Projections & 2011 Actuals


Pro Forma Budgets

379 of the offering documents contained pro forma budgets. Data was collected from the fifth year of the budget or the latest year if a shorter time horizon.
No Pro Formas (70) 19% Two-Year (3) 1% Three-Year (19) 5%

Five Years+ (120) 32%

Four-Year (167) 44%


Financial Averages & Medians

Actual 2011 charter school financial performance closely approximated that projected in pro forma budgets, particularly for DSCR and Debt Burden measures.

Comparison of 2011 Actuals to Pro Forma Projections

Pro Formas Enrollment Total Revenue Total Expenses Net Income Debt Service DSCR Debt Burden 675 $4.688 $3.758 $1.092 $0.700 1.48 13.4% Median FY11 Actuals 680 $5.096 $4.238 $1.057 $0.708 1.39 12.7% % Difference 0.7% 8.7% 12.8% -3.2% 1.1% -6.1% -5.2% Pro Formas 1,421 $12.352 $9.685 $2.667 $1.609 1.74 13.3% Average FY11 Actuals 1,726 $16.031 $13.575 $2.456 $1.761 1.88 12.7% % Difference 21.5% 29.8% 40.2% -7.9% 9.5% 8.0% -4.5%


Defaulted Issues


Default Rates
There were no defaults on issues with investment grade ratings, two defaults on issues with non-investment grade ratings, and 21 defaults on unrated issues. Charter School Bond Default Rates
Rating Category Investment Grade Rating Non-Investment Grade Rating Rated Issues Unrated Issues Total
1 Rating at issuance

Number of Issues Total2 Defaults 0 257 1 44 1 301 21 22 284 583

Rate 0.0% 2.3% 0.3% 7.4% 3.8%

Par in Millions Defaults Total $0.0 $3,697.9 $2.6 $684.9 $2.6 $4,382.8 $170.1 $172.6 $2,058.6 $6,441.4

Rate 0.0% 0.4% 0.1% 8.3% 2.7%

2 Two issues had both a rated and an unrated series.


Comparison of Outstanding to Defaulted Issues

Waitlist information and academic indicators for defaulted and performing schools had greater variance than traditional financial metrics.
Item Financial Statements School Age Enrollment Waitlist Information Pro Formas Academic Data Average Academic Metric Defaulted Outstanding 86% 95% 100% 98% 100% 100% 32% 59% 77% 82% 55% 84% 2.36 3.53


Renewal Status for Defaulted Issues

Renewal status was not directly the reason for default.

Term at Issuance One Year Three Years Five Years Eight Years Ten Years Fifteen Years Thirty Years Total # of Median Charter Schools Age Renewed 1 5.1 1 4 4.1 3 6 4.0 3 1 2.3 0 2 4.5 0 5 5.4 0 3 6.6 3 22 4.6 10 Primary Default Reason Cited Academic Enrollment Other 0% 100% 0% 50% 25% 25% 100% 0% 0% 0% 0% 100% 50% 50% 0% 80% 20% 0% 100% 0% 0% 73% 18% 9%




What Does a Strong Borrower Look Like?

Solid Academic performance?
Strong academic report card Favorable comparative statistics to school district, the state and peer schools either in absolute terms and/or improvement over time 8 defaults occurred as direct result of subpar academics

Compilation of detailed multi-year financial projections?

Critical underwriting tool 5 defaulted transactions had no projections whatsoever

Stability in administration and student body?

Committed and experienced school principal Low teacher turnover Maintenance or growth in terms of grades served Stable or increasing enrollment


What Does a Strong Borrower Look Like?

Status of charter and relationship with authorizer?
Full term charter renewal optimal Positive interim evaluation report from authorizer

Is debt service affordable?

Ideal debt burden is 15% or below 5 defaulted bonds were secured by schools whose projections assumed a five-year debt burden of more than 15%

Is significant enrollment expansion necessary to service the

Each defaulted transaction that disclosed projections (18) required significant enrollment increases in order to meet debt service requirements


Contact Information
Wendy Berry
Author, Charter School Bond Issuance: A Complete History, Volume 2 Reena Bhatia Vice President, LISC 212.455.9884

Bonds & Blackboards: Investing in Charter Schools

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