CHARTER SCHOOL FACILITY FINANCE OVERVIEW
PRESENTED BY:
Scott RolfsManaging Director and Group [email protected]
B.C. Ziegler and Company | Member of SIPC & FINRA
August 2, 2012
• Ziegler Overview• Should We Buy or Rent?• How can we finance the
purchase/construction?• Tax-Exempt Bond Market Dynamics• Other Considerations when borrowing• Questions
TOPICS FOR DISCUSSION
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PREMIERE INVESTMENT BANK FOR NON-PROFITS
Key Statistics• Founded in 1902• Chicago headquarters• 22 regional offices• Expert financier for
charter schools and private K-12 schools
Our MissionAdvancing health, wealth
& well-being through tailored financial solutions
Underwriter of $2.5 billion of financing per year for non-profit schools, senior housing providers, hospitals and churches
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• #1 underwriter of charter school bonds in 2011• High volume/transaction underwriter
OUR EXPERIENCE
Source: Thomson Financial, January 1, 20124
Senior Managing Underwriter Senior Managing Underwriter
Charter School Revenue Bonds Charter School Revenue Bonds
Rank Underwriter # of Issues $ Million Rank Underwriter # of Issues $ Million1 Ziegler Capital Markets 8 163.5 1 RBC Capital Markets 54 683.02 RBC Capital Markets 9 120.8 2 D A Davidson & Co 69 500.73 Piper J affray & Co 16 103.3 3 Robert W Baird & Co 42 346.84 Robert W Baird & Co 7 95.7 4 Piper J affray & Co 50 334.25 D A Davidson & Co 13 67.6 5 Ziegler Capital Markets 16 260.46 Morgan Keegan & Co Inc 2 64.0 6 PNC Financial Services Group 25 249.97 PNC Financial Services Group 4 60.8 7 Morgan Keegan & Co Inc 5 180.68 Lawson Financial Corp 3 19.9 8 Wachovia Securities 14 155.09 Merchant Capital LLC 2 18.9 9 A G Edwards & Sons Inc 13 131.410 Zions First National Bank 3 18.1 10 Dougherty & Company LLC 16 110.2
1/1/2011 - 1/1/2012 1/1/2007 - 1/1/2012
ZIEGLER CHARTER SCHOOL FINANCE HIGHLIGHTS• Sole underwriter of the Renaissance Charter School Series 2011; the second largest charter school
transaction issued to-date• Underwrote the first charter school bond in Louisiana in 2011• Underwrote the first investment-grade charter school bond issue in California in 2006• Underwrote the first rated charter school bond issue in Arkansas in 2010• Underwrote the first LOC-enhanced bond issue for a charter school in North Carolina in 2007
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FACTS ABOUT CHARTER SCHOOLSMANAGEMENT STRUCTURE FACILITY OWNERSHIP
ADEQUATE YEARLY PROGRESS LOCALE
EMO13%
CMO13%
Freestanding74%
Rented65%
Owned30%
No Lease5%
Making AYP62.6%
Failing AYP37.4%
City55.0%
Suburb21.1%
Town7.8%
Rural16.1%
Sources: National Alliance for Public Charter Schools, Center for Education Reform 6
• First decide whether it makes sense to lease or own property
• Leasing advantages• Less upfront costs• Available to younger schools• Flexibility to relocate• Many Charter School Developers that specialize
in acquiring and leasing buildings • Buyer beware as lease terms can vary greatly.
Consult an attorney before signing any documents
SHOULD WE RENT OR BUY?
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• Ownership Advantages• Equity building over time• No risk of lease renewal• Ability to renovate without permission from
landlord• Owning your own site can lead to a better
chance of long-term success (Kaufmann Foundation Study based on data from The Center for Education Reform). Closure rates higher for schools that leased property
• Ownership/Pride for Staff, Students and Alumni• Do not over-leverage (20% of budget to
facilities)
SHOULD WE RENT OR BUY? (CONT)
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• Bank Loan• New Markets Tax Credit• Tax-Exempt Bond issue• Private Note from Seller or other
HOW CAN I FINANCE A BUILDING ACQUISITION?
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PUBLIC FIXED-RATE BONDS SHORT-TERM BANK LOANOVERVIEW Long-term fixed interest rate bonds issued
through a conduit issuer (tax-exempt) or directly by the borrower (taxable)
Medium-term, fixed-rate or fixed spread variable rate mortgage with 1 to 7 year rate-locks
Most common financing structure for mature charter schools
Single “investor” typically a bank or development corporation
PROS Historically low cost interest rates Ability to take advantage of steep yield curve
Can include interest-only periods during enrollment ramp up
Low cost of issuance; but usually recurring with renewal
Capitalized interest for new construction Ability to structure quickly
Can finance cost of issuance of debt to eliminate out-of-pocket spending Non-public issuance
Long-term fixed pricing facilitates long-term planning Available to younger schools
No reliance on bank/lender to renew loan
Flexible covenant structure permits schools to pursue opportunities in the future
CONSPublic disclosure requirement of financial and operating performance
Renewal risk (3-7 year term) – lending partner may not have capacity at renewal time to extend lease or loan. Also Loan to Value issues (“LTV”)
Conduit issuer required to obtain tax-exemption
Interest rate risk – lease/loan could become difficult or impossible to afford in the future if lease/loan rates riseCovenant structure may prohibit pursuit of growth opportunities
PROS & CONS OF MOST COMMON FINANCING OPTIONS
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INTEREST MOVEMENT
40-YEAR HISTORICAL INTEREST RATE | 5-YEAR TREASURY BONDS
Source: Bloomberg
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Topic 3
BOND MARKET UPDATE
CHARTER SCHOOL BONDS HAVE GAINED MARKET ACCEPTANCE
• Issuance history indicates that charter school bonds have gained broad market acceptance
• Municipal bond issuance increased from $35 million in 1998 to a peak of more than $1 billion in 2007
• Market disruption took a toll on issuance in 2008 and 2009, but 2010 and 2011 showed a strong recovery
• 2012 issuance through Q2 is $433 million compared to same period last year when volume was $445 million
Sources: EMMA, Bloomberg, Thomson Financial SDC 13
Charter School Financings by Year through 6/30/12
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24 2734 38 37
5259
82
118
54
34
104
85
41
-
200.0
400.0
600.0
800.0
1,000.0
1,200.0
$ in
Mill
ions
Par # Series
• Municipal Market Data (“MMD”) is the “AAA” tax-exempt benchmark interest rate for municipal bonds− Tax-exempt charter school interest rates are priced in relation to this rate
• Key drivers of the market volatility:− European sovereign debt crisis− Investor fear of systemic municipal debt downgrades and the potential for
defaults− Municipal bond fund cash flows that have fluctuated with movements in
equity markets− Market fears of a “double-dip” recession in the US
Sources: Bloomberg, Municipal Market Data
TAX-EXEMPT FIXED RATE MARKET DYNAMICS
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30yr MMD 1992 to Present
2.50%
3.50%
4.50%
5.50%
6.50%
7.50%
MMD 20-Year Avg 10-Year Avg
30yr MMD Last 12 Months
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
MMD 20-Year Avg 10-Year Avg-0.25-0.20-0.15-0.10-0.050.000.050.100.150.200.25
Municipal Bond Fund Cash Flow (in Millions)
($1,500)
($1,000)
($500)
$0
$500
$1,000
$1,500• MMD currently at 2.90%; all-time low of
2.79% occurred on 7/26/2012― Volatility in U.S. treasury and municipal
rates due to market uncertainty:• Federal Reserve Operation Twist
and Quantitative Easing• U.S. budget deficit issues• European sovereign debt concerns• Supply/demand imbalances
TAX-EXEMPT FIXED RATE MARKET DYNAMICS
Source: Bloomberg, July 20, 2012 15
Current 2.90%10-Year Avg 4.40%20-Year Avg 4.96%20-Year Max 6.95%20-Year Min 2.90%
RATING AGENCIESWhat is a rating?
• A “grade” assigned to your organization and the related debt
• The grade is based on an evaluation of your organization by a third party rating agency
• Investors rely on the grade to give them some tangible measuring stick when evaluating bonds
• Some investors can only purchase higher graded bonds (i.e. investment grade)
• Three primary rating agencies in the US» Standard and Poor’s» Fitch» Moody’s
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• AAA: An obligor rated 'AAA' has extremely strong capacity to meet its financial commitments. 'AAA' is the highest issuer credit rating assigned by Standard & Poor's.
• AA: An obligor rated 'AA' has very strong capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree. Includes:
• A: An obligor rated 'A' has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
• BBB: An obligor rated 'BBB' has adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.
• BB: An obligor rated 'BB' is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitments.
• B: An obligor rated 'B' is more vulnerable than the obligors rated 'BB', but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments.
• CCC: An obligor rated 'CCC' is currently vulnerable, and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments.
• CC: An obligor rated 'CC' is currently highly vulnerable.• C: highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations• CI: past due on interest• R: An obligor rated 'R' is under regulatory supervision owing to its financial condition. During the pendency of the regulatory
supervision, the regulators may have the power to favor one class of obligations over others or pay some obligations and not others.
• SD: has selectively defaulted on some obligations• D: has defaulted on obligations and S&P believes that it will generally default on most or all obligations• NR: not rated
Source: Standard and Poor’s
S&P RATING DEFINITIONS
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CONSIDERATIONS FOR A RATING• Political climate
• Collective bargaining
• Strength of authorizers— How many?— Conflict with school districts?
• State funding— Equitable with traditional public schools— Annual increases— Facilities funding allotments
• Charter renewal and appeal process
• Managed growth—state cap
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DEMAND: WHAT MAKES YOUR SCHOOL SPECIAL?• Documented waitlist
• History of consistent enrollment growth
• Student attendance and turnover
• Teacher turnover rate - Relationship between administration and teachers
• Academic Excellence— State test scores & state accountability rating— Federal requirements – NCLB— Type of curriculum
• Competition (Is Charter v. Charter competition in your market yet?)
• Classroom size19
OTHER CONSIDERATIONS WHEN BORROWING
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FINANCIAL COVENANTS
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• Debt service coverage ratio = usually 1.1x – 1.2x
• Liquidity Covenant− 30 to 45 days cash on hand and/or− Unrestricted cash balance of 5% of prior year operating expenses
• Additional bonds test = usually with historical debt service coverage of 1.25x and projected coverage of 1.25x including proposed debt
• Covenant violation triggers management consultant
MITIGATING CONSTRUCTION RISK
• Primary goal is to build the building on time and on budget.
• Permitting and necessary government approvals
• General contractor experience
• Guaranteed maximum price contract— Liquidated damages— Payment and performance bonds— Contingencies—usually 3-5% of project cost
• Disclosure of Construction Reports
• Environmental Study (any environmental risks present?)
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TOP TEN TRAITS FOR LOWER RATES1. Waitlist Maintain accurate waitlist and purge annually
2. Enrollment History Ability to show consistent demand in prior years
3. Academic Performance How do test scores compare to the district, AYP results
4. Competition Is your program or curriculum unique
5. Charter Renewal One successful charter renewal “under the belt”
6. Board Composition Diversified backgrounds that contribute to the school’s success
7. School Management Talented management team with clear succession plan
8. Financial Performance History of excess revenues and growing fund balance
9. Liquidity A strong balance sheet will lower your cost of capital
10.Debt Ratios Debt burden below 20%, average debt per student below $15,000
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QUESTIONS?
FOLLOW UP CONTACT INFORMATIONSCOTT ROLFS
MANAGING DIRECTOR AND GROUP HEADRELIGION & EDUCATION FINANCEZIEGLER INVESTMENT BANKING
PH: 800 797 4272DIRECT: 414 978 6576
E-MAIL: [email protected]: WWW.ZIEGLER.COM
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