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Moody’s Public Finance Conference – November 12, 2015
Charter School Sector Update
Wendy Berry, NewOak Capital
Prepared by NewOak • Privileged & Confidential 2
• General Industry Update
• Competitive Issues
• Authorizer Update
• Bond Sector Update
• Trends and Observations
TOPICS
Prepared by NewOak • Privileged & Confidential 3
• Laws in 43 states (Alabama latest) and DC
• ~6,700 schools for SY 2014-15– 500 new schools opened last year
• ~2.9 million students
• Key growth factors:– Expansion of existing schools – CMO expansion ~40% of recently approved new charters
GENERAL CHARTER INDUSTRY UPDATE
Prepared by NewOak • Privileged & Confidential 4
NUMBER OF CHARTERS AND ANNUAL % CHANGE
0%
5%
10%
15%
20%
25%
30%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
# of Schools % Annual Change
Source: National Alliance for Public Charter Schools
Prepared by NewOak • Privileged & Confidential 5
NUMBER OF CHARTER SCHOOL STUDENTS AND
ANNUAL % CHANGE
0%
5%
10%
15%
20%
25%
30%
35%
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
# of Students % Annual Change
Source: National Alliance for Public Charter Schools
Prepared by NewOak • Privileged & Confidential 6
• Charter schools serve only 5% of all public school students nationally
• Only 2 states above 10%:– Arizona: 14%– Colorado: 10.4%
• 148 school districts with 10%+ penetration
• 43 school districts with 20%+ penetration
• 21 school districts at 25%+ penetration
CHARTER SCHOOL MARKET SHARE
Source: National Alliance for Public Charter Schools
Prepared by NewOak • Privileged & Confidential 7
CHARTER SCHOOL MARKET SHARE
New Orleans 91%
Detroit 55%
DC and Flint 44%
Cleveland 39%
Kansas City 37%
Philadelphia 30%
San Antonio 26%
Oakland 22%
Los Angeles and Houston 21%
Denver 16%
Boston and Miami 15%
Chicago and Dallas 14%
New York City 7%
Source: National Alliance for Public Charter Schools
Prepared by NewOak • Privileged & Confidential 8
• Other charter schools
• Religiously affiliated schools
• Traditional district schools – particularly those that demonstrate improvement and/or adopt charter-like policies
• Even high tuition independent schools in certain jurisdictions
REGARDLESS OF MARKET SHARE, CHARTERS HAVE TO
COMPETE WITH
Prepared by NewOak • Privileged & Confidential 9
• Enrollment and retention – critical focus
• Charters in districts that pay per pupil tuition directly have experienced:– Delayed payments and/or non-payment– Denial of student busing– Denial of special education services– Denial of local approvals for facility construction and financing
COMPETITIVE ISSUES FOR CHARTER SCHOOLS
Prepared by NewOak • Privileged & Confidential 10
• Key players that exist in various organizational types: State department of education Local school district Non-educational governmental entity Independent chartering board Higher education institution Not-for-profit
• National Association of Charter School Authorizers has set as its priorities:
smarter growth and greater accountability– Close lowest performing charters – up to 1,000 schools– Replace with high performing charters
FOCUS ON AUTHORIZERS
Prepared by NewOak • Privileged & Confidential 11
• Main focus/mission – charter schools• Sizable portfolio of schools, often statewide• Dedicated staff of experts• Comprehensive application process• Clear policies for charter approval, renewal, and revocation• Strong oversight and evaluation of schools• Clear, ongoing information requirements• Transparency – detailed school data
AUTHORIZER FOCUS – WHAT MAKES A GOOD AUTHORIZER?
Prepared by NewOak • Privileged & Confidential 12
• Charter school tax-exempt bond issuance now totals over $12.2 billion, representing ~900 tax-exempt bond transactions since 1998
BOND SECTOR UPDATE
$11 $80 $208$305
$226 $274 $327$396
$572
$1,044
$556
$361
$940$805
$1,127
$1,325
$1,862
$1,875
4
1926
31 34 31
42 43
59
80
45
26
73
53
79 78
95
82
0
10
20
30
40
50
60
70
80
90
100
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
#
($M
illio
ns)
Historical Charter School Bond Issuance Through October 23, 2015
$ Amount Issued (000) # of Issues
Prepared by NewOak • Privileged & Confidential 13
• Charter schools in 29 states and D.C. have accessed the tax-exempt bond market
• Five states account for 60% of volume through 2014
• TEXAS, ARIZONA, COLORADO, FLORIDA, MICHIGAN
ISSUANCE BY STATE
OR RI
AK
NM
MD
NV WI
MO
SC LA ID OH
DE IN NC NJ
GA IL NY
MA
DC
MN
UT
PA
CA MI
FL
CO AZ
TX
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
0
20
40
60
80
100
120
140
Bond Issuance by State: $ (in millions) and # of Transactions Through 2014
Total Par Amount Issued # of Transactions
($00
0)
(#)
Prepared by NewOak • Privileged & Confidential 14
• In recent years, 2/3 of charter school debt volume was rated at issuance
PERCENTAGE OF RATED DEBT
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Rated vs. Unrated ($) by Year
Rated Unrated
Prepared by NewOak • Privileged & Confidential 15
• With new access to state sponsored credit enhancement programs, “AAA” ratings were most prevalent rating category on par basis in 2014
RATINGS AT ISSUANCE
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20122013
2014
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
Initial Rating Categories by Year ($)
NR BIG BBB A AA AAA
Prepared by NewOak • Privileged & Confidential 16
Both number of defaults and percentage of defaulted par increasing
REPAYMENT PERFORMANCE
Charter School Bond Default Rates Through December 31, 2014
Number of Issues Par in Millions
Rating Category1 Defaults Total Rate Defaults Total Rate
Investment Grade Rating 3 336 0.9% $38.6 $5,313.8 0.7%
Non-Investment Grade Rating 6 99 6.1% $63.3 $1,660.8 3.8%
Rated Issues 9 435 2.1% $101.92 $6,974.6 1.5%
Unrated Issues 32 383 8.4% $245.0 $3,441.6 7.1%
Total 41 818 5.0% $346.9 $10,416.2 3.3%
1Rating at Issuance
Prepared by NewOak • Privileged & Confidential 17
• Poor academic performance primary reason for default
• Small par size – median equals $6.6 million
• Vast majority unrated – 90%+
• High percentage of defaults in Michigan (15 or 18.5% of all defaults)
• 22% of defaults underwritten by one firm; 4 firms = 60%
SHARED DEFAULT CHARACTERISTICS
Academics74%
Financial13%
Enrollment10%
Other3%
Stated Reasons for Default
Prepared by NewOak • Privileged & Confidential 18
• Educational funding pendulum continues to swing towards student-centric method and away from school district-centric
• Greater focus by authorizer community on accountability and higher average school quality
• Charter school growth fueled in large part by expansion of CMOs/EMOs vs. stand-alone schools
TRENDS AND OBSERVATIONS
Prepared by NewOak • Privileged & Confidential 19
• Bond financing demand is strong; record sector issuance for 4 years running despite more options for schools to choose from:
– CDFI Bond Guarantee Program– REITs– Turnkey developer products
• Larger Transactions – 2014 median: $13.8 million
• More CMOs vs. stand-alone schools accessing the market
• Greater availability of credit enhancement (in certain states) allows for the full gamut of rating categories expanding investor pool
• Despite underwriting improving significantly, # and % of monetary defaults have increased
TRENDS AND OBSERVATIONS, CONT’D
Prepared by NewOak • Privileged & Confidential 20
This document includes analysis and discussion that has been prepared by NewOak Advisors LLC (“NewOak”). Any recipient of this document (“Recipient”) is hereby notified, and, by their receipt of this document, acknowledges their agreement to be bound by the terms of this Disclaimer Notice. While NewOak’s analysis is based on information NewOak believes to be accurate and reliable, NewOak in no case guarantees their accuracy or completeness or, to the extent dependent thereon, the conclusions as to valuation expressed or inherent herein. NEWOAK HEREBY DISCLAIMS ANY WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
Recipient understands that the analysis and valuation in this document express NewOak’s opinions as of the date stated herein, that changes in the performance of the securities and changing economic conditions and the relationship between risk factors in the future could change NewOak’s opinions as to valuation or expected loss of the securities, and that NewOak shall have no obligation to update the evaluations or notify Recipient thereof.
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