Generally speaking, bonds are not the most interesting topic. So, it's understandable that charter school bond issues -- which are only a small part of the municipal bond market -- might go under the radar. But, that changed this month when editors of The Bond Buyer (a very respected and influential media outlet for those of us working in the bond sector) announced the finalists for the newspaper’s Deal of the Year Awards. The announcement recognized some of the most innovative municipal bond deals that closed between October 1, 2009 and September 30, 2010. More than 70 nominations, big and small, from various municipal sectors were considered. Among the finalists are two charter schools: KIPP Inc. in Houston, one of the two winners in the Southwest region; and High Tech High in Chula Vista, Calif., one of two winners in the Far West region. All the regional finalists are in the running for the overall Deal of the Year Award.
This comes at a time when governments and all other tax-exempt borrowers fund their long-term plans while coping with tough budgetary times and a volatile financial market. This has been especially difficult for small and generally low-investment grade issuers like charter schools. In addition to the usual inherent risks of the sector, conventional or commercial credit enhancement providers i.e. bond insurers, are now completely gone resulting in a more challenging financing environment for charter schools.
The $70 million KIPP Inc. Houston transaction was structured and partially enhanced by a $9 million guaranty from the KIPP-related foundation, Philo Houston LLC, $1 million cash from Local Initiatives Support Corporation and a $10 million balance sheet guaranty from the Bill & Melinda Gates Foundation. In the case of High Tech High, the $12 million deal was the first AAA-rated Qualified School Construction Bond. The credit rating was due to the letter of credit provided by City National Bank, wrapped by AAA-rated Federal Home Loan Bank of San Francisco. These are indeed first-of-its-kind innovative financing structures. Both deals were underwritten by RBC Capital Markets.
Bringing these types of deals in the capital market is a tremendous accomplishment, and all parties involved deserve much credit. This is the first time bonds issued by charter schools have received this type of national recognition from the financial press, a significant step towards making charter school financing mainstream. The outcome should be better acceptance from institutional and other investors, increased market access and eventually, relatively lower cost of capital. We still have a long way to go, but this is a big step forward. The Deal of the Year Award will be announced in New York City on December 9th.