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1. To receive the credit, you must be in attendance for the complete session. BondBuyer is not responsible for late arrivals or connections issues. 2. There will be polling questions asked periodically, all of which you must answer. 3. Qualified attendees will receive Evaluation forms from Susan Korcynski within 3business days of this web seminar. 4. Complete the Evaluation form, keep a copy for yourself and email to CPE@accountingtoday.com or fax to (646) 264-6830. 5. Once the evaluation form is received your CPE certificate will be emailed to you within 5-business days from time of arrival. Please note that Evaluation Forms and CPE Certificates will ONLY be sent to those attendees who stayed for the entire session and answered all polling questions.
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Polling #1
Royal Bank of
Mr. Wildman has over 30 years experience in municipal finance having served as senior manager on over $12 billion in transactions. His areas of concentration include charter schools, affordable housing, and infrastructure finance. Since completing the nations first investment-grade charter school transaction in 2000, the RBCCM charter school group has senior managed over $1,300,000,000 in charter school transactions in 14 states. In 2010 two deals that Bill managed won regional Bond Buyer Deal of the Year Awards, the first time charter schools were so honored. The $67,000,000 KIPP Houston deal was voted Southwest Deal of the Year and the $12,000,000 High Tech High was voted Far West Deal of the Year. In 2011, Bill managed a $22,000,000 transaction for the Alliance for College-Ready Public Schools that enabled the Alliance to pre-pay two New Market Tax Credit CDE loans and deploy the proceeds to two new construction projects.
Successful Investing In Charter School Bonds: Finding Best Practices in a High-Yielding Sector
Presenters: Eugene H. Clark-Herrera, Orrick William Wildman, RBC Capital Markets Reena Bhatia, Local Initiatives Support Corporation Wendy Berry, Local Initiatives Support Corporation
June 5, 2013
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While a small percentage of charter facilities are funded in the same manner as district facilities, in most cases, bond and lease facility payments are tied specifically to per-pupil payments and are funded out of a portion of the per-pupil payment.
State per-pupil payments vary widely from state to state both in process and in amount. In some cases payments are made directly to the school, in others they go through an intermediary. For example, in Washington DC, per-pupil payments are in excess of $13,000 per/student while in California payments are in the range of $6,000/student.
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In this model, the operating entity (Lessee) enters into long-term leases with the separate nonprofit or LLC (Borrower) and makes lease payments to the Borrower/Lessor.
This structure not only reduces the liability of the operator, but allows the operator to manage schools in multiple jurisdictions. In some states, such as California, lessees receive higher per-pupil payments than do operator/owners.
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Financial Covenants
Depending on the ownership and borrower structure, financial covenants may be included in either the loan agreement (operator and borrower) or in the lease (LLC or separate borrower). Typical financial covenants include:
Limitation on Additional Parity Debt or Disposition of Assets: 1.20X to 1.25X existing and proposed debt based on previous years audit and projected debt service Debt Service Coverage equal to 1.10X Maximum Annual Debt Service tested on an annual (audit) basis
Liquidity equal to 45 days cash on hand or similar liquidity measure tested on an annual basis
In CMO structures, subordination of management fees to debt service payment on the bonds or base rent payments Restrictions on subordinate and short-term debt Requirement that failure to meet the coverage and liquidity tests results in the engagement of an independent financial consultant who will develop a plan to remedy the failure
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Waiting lists
Student Retention Rates Teacher Retention Rates
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Continuing Disclosure
In many cases, the borrower and the operator are separate entities. In some cases, teachers, administrators and faculty may be employees of the CMO; in other cases, they may be employees of the individual school. The definition of obligated persons may include the borrower, the school, the CMO or other affiliated entities. Typically, disclosure includes:
Annual Financial Information
Quarterly Information Operating Data
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Disclaimer
RBC Capital Markets, LLC (RBC CM) is providing the information contained in this document for discussion purposes only and not in connection with RBC CM serving as Underwriter, Investment Banker, municipal advisor, financial advisor or fiduciary to a financial transaction participant or any other person or entity. RBC CM will not have any duties or liability to any person or entity in connection with the information being provided herein. The information provided is not intended to be and should not be construed as advice within the mea ning of Section 15B of the Securities Exchange Act of 1934. The financial transaction participant should consult with its own legal, accounting, tax, financial and other advisors, as applicable, to the extent it deems appropriate. This presentation was prepared exclusively for the benefit of and internal use by the recipient for the purpose of considering the transaction or transactions contemplated herein. This presentation is confidential and proprietary to RBC Capital Markets, LLC (RBC CM) a nd may not be disclosed, reproduced, distributed or used for any other purpose by the recipient without RBCCMs express written consent. By acceptance of these materials, and notwithstanding any other express or implied agreement, arrangement, or understanding to the contrary, RBC CM, its affiliates and the recipient agree that the recipient (and its employees, representatives, and other agents) may disclose to any and all persons, without limitation of any kind from the commencement of discussions, the tax treatment, structure or strategy of the transaction and any fact that may be relevant to understanding such treatment, structure or strategy, and all materials of any kind (including opinions or other tax analyses) that are provided to the recipient relating to such tax treatment, structure, or strategy. The information and any analyses contained in this presentation are taken from, or based upon, information obtained from the recipient or from publicly available sources, the completeness and accuracy of which has not been independently verified, and cannot be assured by RBC CM. The information and any analyses in these materials reflect prevailing conditions and RBC CMs views as of this date, all of which are subject to change. To the extent projections and financial analyses are set forth herein, they may be based on estimated financial performance prepared by or in consultation with the recipient and are intended only to suggest reasonable ranges of results. The printed presentation is incomplete without reference to the oral presentation or other written materials that supplement it. IRS Circular 230 Disclosure: RBC CM and its affiliates do not provide tax advice and nothing contained herein should be construed as tax advice. Any discussion of U.S. tax matters contained herein (including any attachments) (i) was not intended or written to be used, and cannot be used, by you for the purpose of avoiding tax penalties; and (ii) was written in connection with the promotion or marketing of the matters addressed herein. Accordingly, you should seek advice based upon your particular circumstances from an independent tax advisor.
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Overview
State Law Differences
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In states where charter schools may be organized as nonprofit corporations under local laws, the typical powers of a nonprofit corporation are granted to charter schools, including the power to own or lease property and enter into contracts. In states where charters are organized as associations, cooperatives or quasi-governmental entities, the scope of the charter schools corporate powers may be unclear (unless specifically outlined in law).
Texas, New Mexico, Nevada and California are examples of states that either require or permit charter schools to be formed as entities other than nonprofit corporations.
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Exemplar Transactions
Bronx Charter School for Excellence (Bronx, NY) (2013)
Structure
Bonds issued to finance acquisition, construction and renovation of facilities. Charter school entity is the borrower. Senior lien on financed facility given to bond trustee. Track record of school garners BBB- rating.
Observations
Pledge of schools per-pupil revenues not permitted under New York law,
and no intercept of funds available.
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Exemplar Transactions
Rocketship Alma Academy (San Jose, CA) (2011)
Structure
Borrower complies with financial covenants in loan agreement. Charter school (tenant) complies with financial covenants in lease agreement.
Observations
Borrower (LLC) may pledge revenues (rental receipts) to bond trustee. Liquidity and coverage covenants require charter school to maintain cash and
balance sheet, but CA rent reimbursement law creates disincentive to pledge charter school revenues.
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Exemplar Transactions
Aspire Public Schools (multiple cities, CA) (2010)
Structure
Bonds issued to acquire and construct charter school facilities. Nonprofit borrower/landlord uses operating leases to schools (short terms
with renewals).
Observations
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Exemplar Transactions
New Plan Learning (Dayton and Lorraine, OH; Chicago, IL) (2011)
Structure
Landlord entities pool property and revenues to secure single obligation. Borrower is obligated group representative, but repayment is joint/several
obligation of entire group.
Observations
Neither Ohio nor Illinois laws permit intercept of school revenues. Financial covenants embedded in school leases as well as borrower
documents.
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Exemplar transactions
Tri-Valley Learning Corporation (Livermore, CA) (2012)
Structure
Charter school is tenant and borrower. Payments to ground lessor subordinate to bond debt service.
Observations
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31 local offices across the country $12 billion in community development capital since 1980 289,000 affordable homes 46 million square feet of retail, community and educational space 169 schools for 68,000 students $33.9 billion in total development
Genesis of Research
In 2009, the Bill & Melinda Gates Foundation made a three-year grant to LISC in conjunction with a $30 million program-related investment for charter school facility bond issuance in the Houston market. As part of its grant responsibilities, LISC has researched data on charter school bond issuance in order to foster market development.
LISC conducted the first phase of its research on rated charter school bond issuance through year-end 2009, which it published as part of its 2010 Charter School Facility Finance Landscape.
LISC published Charter School Bond Issuance: A Complete History as the second phase of its research, focusing on cost and pricing variables for both rated and unrated charter school bond transactions through year-end 2010. This year, LISC completed the third and final phase of its research with the second volume of A Complete History, updated with issuance through May 2012. This volume will focus on underwriting best practices and the credit characteristics of charter school borrowers.
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Polling Question #2
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Market Overview
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Annual Issuance
Issuance Status by Year
(Par Amount in $ Millions)
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Unrated
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($ in Millions)
$1,336
$400
$600 Unrated
$800 Rated
$1,000 All
$1,200
$1,400
$1,600
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Operating Metrics
Total Revenue
Total Expenses Bond Debt Service Paid Total Debt Service Paid Capital Expenditures Depreciation
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Academic Disclosure
We weighted the academic components based on their usefulness in assessing school quality and calculated a metric for each offering based on those weights.
Academic Data Authorizer Report Multi-Year Disaggregate State Multi-Year Aggregage State Single-Year Disaggregate State Single-Year Aggregate State Other Tests/AYP Results District Comparable State Comparable Other Schools Comparable
Weight 3 3 2 2 1 1 1 1 1
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Academic Disclosure
After the sectors earliest years, academic disclosure appears negatively correlated with ease of market access, with disclosure increasing in more difficult markets. Average Academic Metric by Year
5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0.83 3.31 3.63 4.44 4.10 3.47 3.37 4.13 4.13 3.58 3.92
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Defaulted Issues
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Default Rates
There were no defaults on issues with investment grade ratings, two defaults on issues with non-investment grade ratings, and 21 defaults on unrated issues. Charter School Bond Default Rates
Rating Category Investment Grade Rating Non-Investment Grade Rating Rated Issues Unrated Issues Total
1 Rating at issuance
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Par in Millions Defaults Total $0.0 $3,697.9 $2.6 $684.9 $2.6 $4,382.8 $170.1 $172.6 $2,058.6 $6,441.4
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Waitlist information and academic indicators for defaulted and performing schools had greater variance than traditional financial metrics.
Item Financial Statements School Age Enrollment Waitlist Information Pro Formas Academic Data Average Academic Metric Defaulted Outstanding 86% 95% 100% 98% 100% 100% 32% 59% 77% 82% 55% 84% 2.36 3.53
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Conclusion
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Contact Information
Wendy Berry
Author, Charter School Bond Issuance: A Complete History, Volume 2 wendy.w.berry@gmail.com Reena Bhatia Vice President, LISC rbhatia@lisc.org 212.455.9884
www.lisc.org
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