Report cites lack of industry disclosure and underwriting standards, emphasizes academic results as key indicator
NEW YORK, Nov. 15, 2012 /PRNewswire-USNewswire/ -- The tax-exempt bond market's first in-depth evaluation of charter school credit quality details stronger-than-expected financial performance, especially among rated borrowers, and challenges market perceptions about charter school financial risk.
The study—Charter School Bond Issuance: A Complete History, Volume 2—debunks some of the myths surrounding charter school finances, according to Reena Bhatia, vice president of education programs at the Local Initiatives Support Corporation (LISC), which released the study today.
"Charter schools had a surprisingly strong 10.9 percent 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," she said.
The study evaluated 2011 financial statements for 300 charter school borrowers and found their overall financial condition to be sound. Debt ratios were superior to general market expectations, with a higher-than-expected median debt service coverage of 1.41x and a lower-than-expected median debt burden of 12.7 percent. Across 22 different financial metrics, the data suggest healthy fiscal conditions.
Notably, academic performance proved to be a critical indicator of credit quality, though that data is often insufficient in charter offerings or misunderstood by the market. The study found that poor academic performance was the primary cause of 73 percent of the defaults by borrowers in the sector, and a likely contributing factor in another 18 percent. The study details ways to evaluate academic performance as part of an overall review of credit quality.
"Most defaults have occurred among schools with sub-par academic programs that compared poorly with other schools in their district and state," said Elise Balboni, one of the study's authors. "Strong academics attract more students and the per pupil funding attached to them. High-performing schools are unlikely to lose their charters, even in contentious districts. In short, better academics make better borrowers."
Some of the study's other key findings include:
- The tax-exempt charter school bond sector grew to approximately 600 transactions totaling $6.4 billion, as of May 31, 2012.
- There were 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.
- Borrowing costs for charter schools have remained high since the credit crisis. In fact, pricing spreads over AAA debt have been widening, averaging 341 basis points in 2011-12, despite the sector's fiscal health.
- Lack of standardization in measuring charter school risk hampers growth of the sector and negatively affects repayment performance. It discourages high-quality schools from turning to the capital markets for financing, inflates costs for all borrowers, and allows certain charter schools to borrow even though they are not strong enough—either academically or financially—to do so successfully.
Volume 2 is the second installment of LISC's comprehensive review of the charter school municipal bond market. It evaluates offering documents, as well as the credit characteristics of charter school borrowers at the time of issuance, the current financial strength of bond-financed charter schools and repayment performance. The first volume of the study, Charter School Bond Issuance: A Complete History, was released in 2011 and catalogued the size, scope and pricing of charter school bond issues.
"This could be a large, high-performing market segment," Balboni said. "But, less than 10 percent of charter schools are turning to the bond market for financing. We need standardized disclosure and underwriting criteria for borrowers so that strong, credit-worthy charters can access the capital they need and this sector can achieve scale."
The full study, which was funded with support from the Bill & Melinda Gates Foundation, is available at http://www.lisc.org/effc/bondhistoryv2.
LISC combines corporate, government and philanthropic resources to help nonprofit community development corporations revitalize distressed neighborhoods. Since 1980, LISC has raised $12 billion to build or rehab 289,000 affordable homes and develop 46 million square feet of retail, community and educational space. For more information, visit www.lisc.org.