According to a December 28, 2014 article in the Wall Street Journal, charter schools, which educate about 2.6 million students in the U.S., issued more than $1.64 billion of debt in 2014 to acquire real estate and school facilities. This was more than the record volumes from all of last year and the year before. Although charter schools are perceived among the riskiest municipal (public) borrowers, charter schools have had success raising funds in bond sales. Investors’ rising appetite for municipal bonds is a boost for charters, which are typically nonprofit, publicly funded and run independently from local school districts. [Please note TEQlease Education Finance provides 3 to 5 year intermediate term equipment-backed lease financing, not bond sales for real estate acquisitions as described in this article, and this article is for informational purposes only.]
The ramp-up in charter schools’ debt sales comes as mainstay municipal issuers cut back amid post-recession belt-tightening by public officials. They are attracting yield-hungry investors who have pushed into riskier debt in search of better returns amid low interest rates. Investors consider charter-school bonds to be riskier than conventional school-district debt because charter schools’ primary funding is per-student payments from the state rather than local property taxes. That makes it hard for charters to finance buildings or renovations without tapping outside sources like donors or the bond market. Charter-school bonds are the seventh-most likely sector to miss debt payments, out of 33, according to data from Municipal Market Advisors, a research firm based in Concord, Mass. About 1.37% of outstanding charter bonds, including both rated and unrated debt, have defaulted. That compares with an average of .03% for all rated bonds over the past five years, according to a report by Moody’s Investors Service. Charter schools have issued more than $10 billion in bonds since 1998.
Other factors are driving charter-school bond sales. For example, charter schools in Texas have benefitted when the State agreed to guarantee its bonds—and those of other investment-grade charters—through the $37.7 billion Permanent School Fund, the nation’s largest education endowment. Six Texas charter-school operators have now accessed the guarantee to back about $273 million in debt, according to the Texas Charter Schools Association. Meanwhile, the growth of charters poses an increasing risk for public school systems in cities such as Philadelphia, Cleveland and St. Louis that compete with them for students and state money, according to a report by Moody’s. Students’ flight to charters has helped reduce the Philadelphia district’s underlying credit rating to junk, which is defined as below BBB- or the equivalent, though investors are protected by a state program that can withhold district funds for bondholders, Moody’s said. [The process of accessing the bond market, such as receiving a credit rating, is difficult and should not be underestimated. We recommend getting advice on this subject from professional advisors.]