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

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• 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

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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

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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

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• 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

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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

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• 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

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• 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

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• 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

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• 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?

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• 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

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$1,800

$2,000

#

($M

illio

ns)

Historical Charter School Bond Issuance Through October 23, 2015

$ Amount Issued (000) # of Issues

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• 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

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140

Bond Issuance by State: $ (in millions) and # of Transactions Through 2014

Total Par Amount Issued # of Transactions

($00

0)

(#)

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• 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

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• 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

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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

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• 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

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• 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

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• 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

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