Bond Buyer Presentation on Charter School Bonds 060513_Final_presentation

7/28/2019 Bond Buyer Presentation on Charter School Bonds 060513_Final_presentation

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Welcome to Todays Web Seminar!

June 5, 2013

12:00 PM ET/9:00 AM PT

Presented by: Hosted By:


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Michael Stantonis the publisher ofThe BondBuyer, the daily newspaper of municipal finance withmore 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 thatproduces more than 10 events on hot topics inmunicipal finance each year.

Prior to being named publisher in late 2005, he was theprogram manager for The Bond Buyer Conferences,

and earlier served in several positions in thenewsroom, including Editor-in-Chief from 1999 through2000.

He is a graduate of Columbia University and receivedan MBA from Harvard Business School.


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SourceMedia, Inc. is pleased to be able to offer CPE for this web session. It isimperative that you adhere to the following instructions to obtain CPE credit.

1. To receive the credit, you must be in attendance for the completesession. BondBuyeris 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 3-

business days of this web seminar.4. Complete the Evaluation form, keep a copy for yourself and email to

[email protected] 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 thoseattendees 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 CPESponsors, 150 Fourth Avenue North, Nashville, TN, 37219-2417 or by visiting the web site: www.nasba.org.
mailto:[email protected]://www.nasba.org/http://www.nasba.org/mailto:[email protected]


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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

California and New York MCLECredit Available

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Polling #1

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Wil l iam Wildman, Director Royal Bank ofCanada Capital Markets (RBCCM)

Mr. Wildman has over 30 years experience in municipal financehaving served as senior manager on over $12 billion in transactions.

His areas of concentration include charter schools, affordablehousing, and infrastructure finance. Since completing the nations

first investment-grade charter school transaction in 2000, theRBCCM charter school group has senior managed over$1,300,000,000 in charter school transactions in 14 states. In 2010two 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 theYear and the $12,000,000 High Tech High was voted Far West Dealof the Year. In 2011, Bill managed a $22,000,000 transaction for theAlliance for College-Ready Public Schools that enabled the Allianceto pre-pay two New Market Tax Credit CDE loans and deploy theproceeds to two new construction projects.


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Reena Bhatiais Vice President of Education Programs atLocal Initiatives Support Corporation. She spent the majority ofher finance career with Prudential, structuring non-traditionalsocial investments, including those for charter schools, forPrudential Financial's Social Investment Group and serving as a

researcher in Prudential Securities' Equity ResearchDepartment. She also worked for the KIPP Foundation, first aspart of its national Real Estate Group and then as FinancialManager for TEAM Academy Charter School. While completingher M.B.A. at New York University, Reena was selected as a

Broad Resident in Urban Education, serving as a summerresident with the San Francisco Unified School District. Sheholds a B.S. in Finance from Rutgers College and an M.B.A.from New York University.


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Wendy Berryhas an extensive background in municipalcredit 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 includinghousing, higher education, and tax increment financing. She alsospent three years as an investment banker where she executed

numerous education-related financings, including colleges andcharter schools. While at Jefferies, she authored the firstcomprehensive bond report on charter school bonds entitledAnalysis 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 LISCconducting research on the charter school sector (for which she co-authored the 2011 and 2012 publications Charter School BondIssuance: A Complete History, Volume I and II), and as a municipalcredit analyst consultant for Savader Asset Advisors.


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Eugene Clark-Herrera, a partner in Orrick'sPublic Finance Group, focuses his practice onfinancing for school and college facilities, as well ascity and county facilities and infrastructure. His

practice includes serving as bond and disclosurecounsel on revenue and tax-supported bondfinancing involving charter schools, counties, cities,school and college districts, airports, and student and

multi-family housing projects. Mr. Clark-Herrera hasexperience with a variety of financing structures andcharacteristics, including pension obligation bonds,synthetic fixed rate bonds, and various reinvestmentvehicles.


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

Presenters:Eugene H. Clark-Herrera, OrrickWilliam Wildman, RBC Capital MarketsReena Bhatia, Local Initiatives Support CorporationWendy Berry, Local Initiatives Support Corporation

June 5, 2013


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Part I Credit Considerations and Market Trends


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Both charter schools and district schools are public K-12 schools that relyprimarily on governmental payments and tax revenues for operational andfacilities funding.

In the case of charter schools, the primary source of funding is a state ordistrict per-pupil payment. Payments are not vouchers but follow thestudent to the specific school he or she attends.

Neither district schools nor charter schools charge tuition; however, bothmay benefit from contributions, donations, and user fees in addition togovernmental payments.

District or traditional schools are operated by governmental entities suchas 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 therequirements of state education codes and federal regulations.

Charter Public Schools and District PublicSchools


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Creation and Oversight of Charter Schools

Each state has its own charter law that outlines the terms and conditions for thecreation, management and operation of charter schools.

Charterschools are created through a charter issued by a charter authorizer.The charter is a contract between the authorizer and the charter school settingout 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, schooldistricts, cities, counties, tribal governments and a variety of nonprofit or quasi-governmental 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 criteriaoutlined in the state law and the specific charter contract.


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Charter and District Facilities

District schools operate in easily recognizable elementary, middle and high school facilitiesgenerally 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.


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

Charter and Educational Management Organizations (CMO and EMO) arecharacterized by a system of schools all of which employ similar curriculum, financialand administrative components.

In some CMOs schools are operated by a single entity that holds the charters. In othercases, schools are community organizations with independent boards and chartersthat contract with a management company to provide various services.

In certain cases, a CMO may hold a single charter but operate multiple campuses. Inother cases, each campus is a separate nonprofit corporation with its own charter. Incases in which there are multiple corporations and charters, state law may restrict theability 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 theseservices. 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 charterwith one or more campuses within a single jurisdiction.


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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.


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Factors in Credit Analysis

Unlike tax-supported debt, charter school bonds rely primarily on the ability of theschool to attract and retain students in order to service debt. In that regard, charterschools resemble businesses more than they do governmental entities.

Charter school facilities are special purpose facilities, suited primarily for the operationof educational institutions. Unlike apartments and commercial real estate, charterfacilities 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 flowfrom 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 tostrengthen the security and sources of payment.

Credit analysis is concerned with an assessment of the ability of the school tomaintain operations for the life of the bonds, as well as use of a security structure thatassures the investor that, so long as the school operates, the trustee has the legaltools necessary to capture debt service payments on a priority basis.

Because of the variation of ownership and borrower structures, the borrower mayhave limited assets and restricted revenues. In this case, the primary credit is thecredit of the operator/lessee (i.e., the school), not the borrower.


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Financial Covenants

Limitation on Additional Parity Debt or Disposition of Assets: 1.20X to 1.25Xexisting and proposed debt based on previous years audit and projected debtservice

Debt Service Coverage equal to 1.10X Maximum Annual Debt Service tested onan annual (audit) basis

Liquidity equal to 45 days cash on hand or similar liquidity measure tested on anannual 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 theengagement of an independent financial consultant who will develop a plan toremedy the failure

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

financial covenants include:


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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


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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


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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 operatingrevenues


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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


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RBC Capital Markets, LLC (RBC CM) is providing the information contained in this document for discussion purposes only and not inconnection 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 meaning 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) and 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 inconsultation 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.

Disclaimer


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Part II Legal Issues


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Overview

State Law Differences

Basic Legal Structure for Charter Bond Financing

Variations on the Theme


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

States that have charter school laws:

Alaska Idaho Mississippi Pennsylvania

Arizona Illinois Missouri Rhode Island

Arkansas Indiana Nevada South Carolina

California Iowa New Hampshire Tennessee

Colorado Kansas New Jersey Texas

Connecticut Louisiana New Mexico Utah

Delaware Maine New York Virginia

District of Columbia Maryland North Carolina Washington

Florida Massachusetts Ohio Wisconsin

Georgia Michigan Oklahoma Wyoming

Hawaii Minnesota Oregon


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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 non-

governmental 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.


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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.


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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.


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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 andclearly defined criteria upon the revocation process, and some allow for

automatic revocation upon the occurrence of certain extraordinaryconditions (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 toavoid revocation by simply shopping for a new authorizer without

addressing the conditions that gave rise to the original revocation process.


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Charter School Funding

Charter schools are almost uniformly funded based on attendance, from thesame public money that funds traditional K-12 school districts. The per-pupil funding may vary in amount, however, from the level provided totraditional public schools.

Certain states, such as the District of Columbia and California, augmentcharter school operating funds with separate per-pupil funding specificallyavailable for facilities expenses.

Charter school funding may typically be pledged to secure indebtedness,pursuant to corporate powers of the school; however, certain states, suchas New York, specifically prohibit any security interest in charter school

funds.

Other states, such as Arizona and California, permit charter school funds tobe intercepted before disbursement to the charter school, for direct

transfer to a bond trustee as security for bond repayment.



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Exemplar Transactions

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

Structure

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 ofschool garners BBB- rating.

Observations

Pledge of schools per-pupil revenues not permitted under New York law,

and no intercept of funds available.


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

Structure

Bonds issued to refinance construction loan and finance additional project

costs.

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.

Observations

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.


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

Structure

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.

Observations

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.


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

Structure

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.

Observations

Neither Ohio nor Illinois laws permit intercept of school revenues.

Financial covenants embedded in school leases as well as borrower

documents.


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Exemplar transactions

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

Structure

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.

Observations

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.


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Part III Charter School Bond Issuance:

A Complete History


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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

LISC helps community residents transform distressed neighborhoodsinto healthy and sustainable communities of choice and opportunity.

Local Initiatives Support Corporation (LISC)


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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 issuancethrough year-end 2009, which it published as part of its 2010 Charter School Facility

Finance Landscape.

LISC published Charter School Bond Issuance: A Complete Historyas 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 ofA Complete History, updated with issuance through May 2012. This

volume will focus on underwriting best practices and the credit characteristics of

charter school borrowers.

Genesis of Research


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Polling Question #2


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Charter School Bond Issuance

Market Overview


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Issuance Status by Year(Par Amount in $ Millions)

Annual Issuance


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Analysis of Outstanding Issues

Financial Measures


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306 of the charter school borrowers had sufficient financial information. The

remaining either had insufficient information or were not required to disclose.

2011 Financial Statement Disclosure


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1 Excludes capital expenditures

Bond DSCR by Par Amount Outstanding($ in Millions)

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.

.

2011 Bond Debt Service Coverage

$385

$868

$791

$536

$566

$580

$456

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000


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68% of the par amount outstanding had a debt burden of less than15% while 39% had a burden less than 10%. The median was 12.6%.

Debt Burden by Par Amount Outstanding($ in Millions)

($ in Millions)

$374

$971

$923

$268

$1,336

$313

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600

20%+

15% - 19.9%

12% - 14.9%

10% - 11.9%

5% - 9.9%

Less than 5%

Unrated Rated All

2011 Debt Burden


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Balance Sheet Metrics Operating MetricsBonds Outstanding Total Revenue

Debt Outstanding Total Expenses

Cash & Investments Bond Debt Service Paid

Cash & Investments, Net of DSRF Total Debt Service Paid

Unrestricted Cash & Investments Capital Expenditures

Change in Unrestricted Cash & Investments Depreciation

DCOH, All Cash & Investments Net Income, Excluding Capital

DCOH, Net of DSRF Net Income, Including Capital

DCOH, Unrestricted Debt Burden

Total Assets Expenses per Day

Governmental Fund Balance, if applicable Increase in Total Assets

Change in Governmental Fund Balance % Change in Total Assets

Other Financial Metrics Captured in Analysis


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Underwriting Best Practices


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We analyzed the offering documents for the outstanding issuesand tallied the type of academic data provided for each.

Raw Academic Data

64

60

215

186

223

8

125

21

128

6

0 50 100 150 200 250

No Academic Information

Other Schools Comparable

State Comparable

District Comparable

Other Tests/AYP Results

Single-Year Aggregate State

Single-Year Disaggregate State

Multi-Year Aggregage State

Multi-Year Disaggregate State

Authorizer Report

Academic Disclosure at Issuance


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

Academic Metric Distribution

Academic Data WeightAuthorizer Report 3

Multi-Year Disaggregate State 3

Multi-Year Aggregage State 2

Single-Year Disaggregate State 2

Single-Year Aggregate State 1

Other Tests/AYP Results 1

District Comparable 1State Comparable 1

Other Schools Comparable 1

Academic Disclosure


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Average Academic Metric by Year

After the sectors earliest years, academic disclosure appears negatively correlatedwith ease of market access, with disclosure increasing in more difficult markets.

0.83

3.31

3.63

4.10

3.473.37

4.13

4.44

4.13

3.58

3.92

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Academic Disclosure


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Comparison of Projections & 2011 Actuals


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No Pro

Formas(70)

19%

Two-Year

(3)1%

Three-Year

(19)

5%

Four-Year

(167)

44%

Five Years+

(120)

32%

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.

Pro Forma Budgets


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Actual 2011 charter school financial performance closely approximated thatprojected in pro forma budgets, particularly for DSCR and Debt Burden

measures.

Comparison of 2011 Actuals to Pro Forma ProjectionsMedian Average

Pro FY11 % Pro FY11 %

Formas Actuals Difference Formas Actuals Difference

Enrollment 675 680 0.7% 1,421 1,726 21.5%

Total Revenue $4.688 $5.096 8.7% $12.352 $16.031 29.8%

Total Expenses $3.758 $4.238 12.8% $9.685 $13.575 40.2%

Net Income $1.092 $1.057 -3.2% $2.667 $2.456 -7.9%

Debt Service $0.700 $0.708 1.1% $1.609 $1.761 9.5%DSCR 1.48 1.39 -6.1% 1.74 1.88 8.0%

Debt Burden 13.4% 12.7% -5.2% 13.3% 12.7% -4.5%

Financial Averages & Medians


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Defaulted Issues


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Charter School Bond Default Rates

1 Rating at issuance

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

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.

Rating Category1

Defaults Total2

Rate Defaults Total Rate

Investment Grade Rating 0 257 0.0% $0.0 $3,697.9 0.0%

Non-Investment Grade Rating 1 44 2.3% $2.6 $684.9 0.4%

Rated Issues 1 301 0.3% $2.6 $4,382.8 0.1%

Unrated Issues 21 284 7.4% $170.1 $2,058.6 8.3%

Total 22 583 3.8% $172.6 $6,441.4 2.7%

Number of Issues Par in Millions

Default Rates


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Waitlist information and academic indicators for defaulted and performing

schools had greater variance than traditional financial metrics.

Item Defaulted Outstanding

Financial Statements 86% 95%

School Age 100% 98%Enrollment 100% 100%

Waitlist Information 32% 59%

Pro Formas 77% 82%

Academic Data 55% 84%

Average Academic Metric 2.36 3.53

Comparison of Outstanding to Defaulted Issues


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Renewal status was not directly the reason for default.

Term at # of Median Charter Primary Default Reason Cited

Issuance Schools Age Renewed Academic Enrollment Other

One Year 1 5.1 1 0% 100% 0%

Three Years 4 4.1 3 50% 25% 25%Five Years 6 4.0 3 100% 0% 0%

Eight Years 1 2.3 0 0% 0% 100%

Ten Years 2 4.5 0 50% 50% 0%

Fifteen Years 5 5.4 0 80% 20% 0%

Thirty Years 3 6.6 3 100% 0% 0%

Total 22 4.6 10 73% 18% 9%

Renewal Status for Defaulted Issues


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Conclusion


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Solid Academic performance? Strong academic report card

Favorable comparative statistics to school district, the state and peer schoolseither 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?


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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 assumeda five-yeardebt burden of more than 15%

Is significant enrollment expansion necessary to service thedebt?

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

What Does a Strong Borrower Look Like?


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Wendy Berry

Author, Charter School Bond Issuance: A Complete History, Volume 2

[email protected]

Reena Bhatia

Vice President, LISC

[email protected]

212.455.9884

www.lisc.org

Contact Information


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Join us on July 10th in NYC at the

Harvard Club (35 West 44th St.)

View Agenda and Register:

http://www.lisc.org/section/ourwork/national/education/_2013bondconf

Find LISCsBond Researchat:

http://www.lisc.org/section/ourwork/national/education/publications/bondhistoryv2

Bonds & Blackboards: Investing in Charter

Schools
http://www.lisc.org/section/ourwork/national/education/_2013bondconfhttp://www.lisc.org/section/ourwork/national/education/publications/bondhistoryv2http://www.lisc.org/section/ourwork/national/education/publications/bondhistoryv2http://www.lisc.org/section/ourwork/national/education/_2013bondconf

Bond Buyer Presentation on Charter School Bonds 060513_Final_presentation

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