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The Charter Blog
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Friday, July 27, 2012
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Fitch publishes draft of charter school credit rating criteria
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Recently, Fitch Ratings, citing “recent events in the charter school sector,” published a draft of the criteria that outlines changes to the way the agency proposes to analyze public charter schools. The so-called “exposure draft” includes a number of proposed amendments to existing criteria. For example, schools with significant credit strengths could reach investment grade, but will be capped at the ‘BBB’ rating category (the 4th highest possible rating). Fitch also proposes to rate as non-investment grade any schools that have less than five years of audited operating history and no charter renewals. Likewise, if a charter school would use bond financing to accommodate enrollment growth, or if a school had 400 students or less, or less than four grade levels, it could not obtain an investment grade rating. If applied in the proposed form, the exposure draft would trigger a substantial number of downgrades to existing charter school ratings.
The suggestion that they may retroactively "downgrade" existing, high-performing charter schools that are fully and faithfully meeting their bond payment obligations to bondholders is quite problematic. The new criteria could have a chilling effect on the public charter school sector by making it more difficult for charter school organizations to obtain investment grade ratings and related lower-cost, tax-exempt bond financing. It would also discourage bond investors from investing in the sector, thus reducing capital supply and liquidity. This is an unfortunate change of course for public charters schools since our sector has never defaulted on a bond with an investment grade rating.
In short, these ratings adjustments will make it more expensive and even harder for charter schools to access tax-exempt bond financing to finance their facilities.
Fitch Ratings expects the proposed changes will affect ratings on nearly all charter schools. The agency currently rates 22 charter school transactions “investment grade” and expects most, if not all, of these ratings would be downgraded to non-investment grade under the proposed criteria. The vulnerability of charter schools, which Fitch Ratings views as inherently non-investment grade due to their typically high leverage, renewal uncertainty and lack of operational and financial flexibility, demonstrates the need for wider access for financially-sound public charter schools to state-backed bond guarantees. In states like Texas, where public charter schools can utilize the state’s credit rating to finance facilities, charter schools will be able to finance growth at costs that are level with traditional public schools. Elsewhere, significant facilities finance issues will remain, or get worse.
Fitch Ratings invites comments on the exposure draft through August 20, 2012. You can click the following links to view the full Fitch Ratings report and the main proposal areas for feedback.
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Posted by:
NAPCS Pressroom
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6:00 AM
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Wednesday, July 11, 2012
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Public Charter Schools: Borrowing with Tax-Exempt Bonds
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Despite the growing body of evidence suggesting public charter schools are making a difference for our least served students, the challenge of securing affordable facilities continues to confront nearly every charter school. The landscape of solutions now includes government-sponsored, private sector, and collaborative programs that provide facilities or facilities financing. Borrowing through the issuance of tax-exempt bonds has emerged as an effective option to obtain low-cost facilities financing.
Nonprofit corporations have borrowed money using tax-exempt bonds for decades. As the tax-exempt bond market has experienced a substantial expansion in the types of nonprofits using such financing (previously dominated by hospitals and universities), individual public charter schools and groups of commonly managed public charter schools are borrowing on a tax-exempt basis. Since 1998, over 400 public charter schools have borrowed over $5 billion using tax-exempt bonds. Bond market access has been spurred by increasing demand for facilities, better understanding of the benefits of tax-exempt financing, and greater market acceptance of public charter school credit. Not only large, established public charter school management organizations (CMOs) with substantial financial resources need apply, but also relatively small, even start-up, public charter schools with limited credit history may be financeable under certain circumstances.
A newly released publication, Public Charter Schools: Borrowing with Tax-Exempt Bonds, is a valuable resource for charter schools that are seeking long-term, low cost capital to finance their facility needs. The purpose of this booklet is two-fold: first, to provide public charter schools that might not have previously considered or fully understood tax-exempt financing with relevant information about the benefits of, their eligibility for, and the procedures associated with such financing; and second, to offer public charter schools guidance and best practices to follow so that they are well positioned to access the bond market if desired. Highlights of this book were presented by the authors at the NAPCS National Charter Schools Conference in Minneapolis.
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Posted by:
NAPCS Pressroom
at
6:00 AM
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