August 2, 2012
CHARTER SCHOOL FACILITY FINANCE OVERVIEW
PRESENTED BY:
Scott Rolfs
Managing Director and Group Head
414-978-6576
srolfs@ziegler.com
B.C. Ziegler and Company | Member of SIPC & FINRA
TOPICS FOR DISCUSSION
• Ziegler Overview
• Should We Buy or Rent?
• How can we finance the purchase/construction?
• Tax-Exempt Bond Market Dynamics
• Other Considerations when borrowing
• Questions
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PREMIERE INVESTMENT BANK FOR NON-PROFITS
Key Statistics
• Founded in 1902
• Chicago
headquarters
• 22 regional offices
Our Mission
Advancing health,
wealth & well-being
through tailored
financial solutions
• Expert financier for
charter schools and
private K-12 schools
Underwriter of $2.5 billion of financing per year for non-profit schools, senior
housing providers, hospitals and churches
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OUR EXPERIENCE
Rank
Senior Managing Underwriter
Senior Managing Underwriter
1/1/2011 - 1/1/2012
1/1/2007 - 1/1/2012
Charter School Revenue Bonds
Charter School Revenue Bonds
Underwriter
# of Issues
$ Million
Rank
Underwriter
# of Issues
$ Million
1
Ziegler Capital Markets
8
163.5
1
RBC Capital Markets
54
683.0
2
RBC Capital Markets
9
120.8
2
D A Davidson & Co
69
500.7
3
Piper Jaffray & Co
16
103.3
3
Robert W Baird & Co
42
346.8
4
Robert W Baird & Co
7
95.7
4
Piper Jaffray & Co
50
334.2
5
D A Davidson & Co
13
67.6
5
Ziegler Capital Markets
16
260.4
6
Morgan Keegan & Co Inc
2
64.0
6
PNC Financial Services Group
25
249.9
7
PNC Financial Services Group
4
60.8
7
Morgan Keegan & Co Inc
5
180.6
8
Lawson Financial Corp
3
19.9
8
Wachovia Securities
14
155.0
9
Merchant Capital LLC
2
18.9
9
A G Edwards & Sons Inc
13
131.4
Zions First National Bank
3
18.1
10
Dougherty & Company LLC
16
110.2
10
•
#1 underwriter of charter school bonds in 2011
•
High volume/transaction underwriter
Source: Thomson Financial, January 1, 2012
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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 SCHOOLS
MANAGEMENT STRUCTURE
FACILITY OWNERSHIP
EMO
13%
CMO
13%
Rented
65%
Owned
30%
Freestanding
74%
No Lease
5%
ADEQUATE YEARLY PROGRESS
LOCALE
Suburb
21.1%
Making AYP
62.6%
Failing AYP
37.4%
City
55.0%
Town
7.8%
Rural
16.1%
Sources: National Alliance for Public Charter Schools, Center for Education Reform
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SHOULD WE RENT OR BUY?
• 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
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SHOULD WE RENT OR BUY? (CONT)
• 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)
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HOW CAN I FINANCE A BUILDING ACQUISITION?
• Bank Loan
• New Markets Tax Credit
• Tax-Exempt Bond issue
• Private Note from Seller or other
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PROS & CONS OF MOST COMMON FINANCING OPTIONS
PUBLIC FIXED-RATE BONDS
OVERVIEW
PROS
SHORT-TERM BANK LOAN
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
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
CONS
Public disclosure requirement of financial and
operating performance
Conduit issuer required to obtain tax-exemption
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”)
Interest rate risk – lease/loan could become
difficult or impossible to afford in the future if
lease/loan rates rise
Covenant structure may prohibit pursuit of growth
opportunities
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INTEREST MOVEMENT
40-YEAR HISTORICAL INTEREST RATE | 5-YEAR TREASURY BONDS
Source: Bloomberg
BOND MARKET UPDATE
Topic 3
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CHARTER SCHOOL BONDS HAVE GAINED MARKET ACCEPTANCE
Charter School Financings by Year through 6/30/12
•
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
1,200.0
118
104
1,000.0
$ in Millions
600.0
52
400.0
24
200.0
85
82
800.0
27
34
38
59
54
37
34
41
6
-
Par
Sources: EMMA, Bloomberg, Thomson Financial SDC
# Series
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TAX-EXEMPT FIXED RATE MARKET DYNAMICS
•
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
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TAX-EXEMPT FIXED RATE MARKET DYNAMICS
30yr MMD 1992 to Present
7.50%
6.50%
30yr MMD Last 12 Months
Current
2.90%
10-Year Avg
4.40%
20-Year Avg
4.96%
20-Year Max
6.95%
20-Year Min
2.90%
5.50%
5.50%
5.00%
4.50%
4.00%
4.50%
3.50%
3.00%
3.50%
MMD
20-Year Avg
MMD
10-Year Avg
20-Year Avg
10-Year Avg
2.50%
2.50%
•
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
Municipal Bond Fund Cash Flow (in Millions)
$1,500
$1,000
$500
$0
($500)
($1,000)
($1,500)
Source: Bloomberg, July 20, 2012
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RATING AGENCIES
What 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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S&P RATING DEFINITIONS
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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
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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 size
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OTHER CONSIDERATIONS WHEN BORROWING
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FINANCIAL COVENANTS
•
•
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
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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 RATES
1. 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 INFORMATION
SCOTT ROLFS
MANAGING DIRECTOR AND GROUP HEAD
RELIGION & EDUCATION FINANCE
ZIEGLER INVESTMENT BANKING
PH: 800 797 4272
DIRECT: 414 978 6576
E-MAIL: SROLFS@ZIEGLER.COM
WEB: WWW.ZIEGLER.COM
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