Bloomberg News reports that charter schools are borrowing money at a record pace, relying on state guarantees to improve their credit ratings.
On their own, charters would be considered junk bond status. But state guarantees allow them to issue bonds with higher ratings.
U.S. charter schools are issuing a record amount of municipal debt, with Texas leading the charge as borrowers rated close to junk tap a program that gives their bonds top credit grades.
The institutions, privately run with public funding, have sold $1.6 billion of securities in 2014, data compiled by Bloomberg show. That’s more than all of last year and the most in Bloomberg data beginning in 2007. About $464 million has come from Texas, which for the first time in April backed a charter-school deal with its Permanent School Fund. The state-run pool guarantees bonds, lending the debt the AAA grade that Standard & Poor’s accords Texas.
Charter schools, which enroll 4.2 percent of U.S. public school students, are building a presence in the bond market as more parents seek academic options without paying private-school tuition. In Texas, the number of institutions tripled from 2000 to 2012 and enrollment jumped to 190,000 from 26,000, according to the National Center for Education Statistics.
“The backing of the Permanent School Fund is critical to the growth of charter schools” given the savings it generates, said David Dunn, executive director of the Austin-based Texas Charter Schools Association. “There’s still a lot of room to go. We’re still not meeting the demand.”
Texas’s Growth
The growth in charter issuance contrasts with a slowdown in the $3.7 trillion municipal market as states and cities still recovering from the recession hesitate to borrow even as yields approach generational lows. Muni sales are down 7 percent from last year’s pace, Bloomberg data show.
Yet in Texas, home to seven of the 15 fastest-growing U.S. cities, municipalities are borrowing the most since 2008 as a swelling population fuels infrastructure investment. Charter schools have the same need, with enrollment growing about 15 percent annually in the last six years, Dunn said.
Life School, which has more than 4,500 students on campuses in Dallas County and Ellis County to the south, in April became the state’s first charter to issue debt backed by the School Fund.
Tax-exempt bonds maturing in August 2044 priced to yield 4.13 percent, or about 0.5 percentage point more than benchmark 30-year munis.
Without the guarantee from the fund, created in 1854, the school has a BBB- rating from S&P, the lowest level of investment grade. Institutions need to earn an above-junk rank on their own to get the backing.
Republican Governor Rick Perry has said more of the institutions should be permitted. The state guarantee has won over investors.
“It’s a state where you clearly see that they’re supportive,” said John Flahive, Boston-based director of fixed income at BNY Mellon Wealth Management, which oversees about $20 billion in munis and has bought debt of Texas charter schools.
“It’s a tricky sector,” he said. “Politics play a role in whether you can really see it working out for the life of the bond.”
Colorado and Utah also help boost the grades of schools in those states, said Wendy Berry at Charter School Advisors, which is based in Albany, New York, and counsels the institutions.
Great Hearts
Arizona ranks second behind Texas in issuance in 2014. Phoenix’s industrial development agency this month sold about $80 million of tax-free bonds for Great Hearts Academies in the state’s largest charter-school borrowing this year. The deal refinanced securities and paid for new facilities. S&P rated the debt BB+, one step below investment grade.
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