Volume
Since LISC’s publication of the 2015 Bond Study, there has been record annual volume in charter school bond issuance. The 2015 Bond Study included all charter school bond offerings issued between the first transaction in 1998 and December 31, 2014—over 800 issues totaling $10 billion in par issuance based on available information at the time of publication. In the 8-year period between January 1, 2015, and December 31, 2022, the sector grew by more than $29 billion (across more than 1,000 new issues) to reach more than $40 billion in total par issued. To put this growth in context, the $29 billion in par issuance since 2015 is more than double the total par issued in the first 17 years of the sector combined.
As the accompanying chart shows, except for reduced market activity during the credit crisis of 2008 and 2009, which affected all municipal sectors, there has been a consistent upward trend in charter school bond issuance. Issuance declined slightly from 2017 to 2018 due primarily to a surge in issuance at year-end 2017 prior to the elimination of the tax exemption on advance refunding bonds that went into effect on January 1, 2018. Annual issuance peaked in 2021 with 198 issues totaling more than $4.5 billion in par issuance—more than 2 times the peak annual volume as of the 2015 Bond Study ($1.9 billion in 2014)—resulting in the sector’s third consecutive year of record volume on both a transaction count and par amount basis. In 2022, activity was down in terms of the number of transactions (173), but par issuance continued on its upward trajectory.
Sustained growth in charter school bond issuance since the 2008 credit crisis contrasts with slower growth and greater volatility in overall municipal bond market activity. Between 2015 and 2022 specifically, total long-term public municipal issuance grew by an average of approximately 4% per year. Charter school bond issuance increased by 14% per year on average over the same period—more than 3 times the growth rate of the municipal sector. In 2022, charter school bond issuance surpassed 1% of total U.S. long-term municipal issuance of $391 billion.7
Par Amount
Charter schools have issued bonds in par amounts ranging from less than $1 million to well over $100 million, and even over $300 million on an outlier basis. The median par amount of all charter school bonds issued since 1998 is $12 million. The annual median par amount of charter school bond offerings has increased steadily over the sector’s history to $16.8 million as of 2022. Average par has consistently exceeded median par, driven each year by large issuances by charter management organizations (CMOs). These CMOs often support multiple campuses and, in many cases, encompass full regions or regional networks.
The bulk of transactions executed between 2015 and 2022 was in the $10 million to $24.9 million range. Transactions in this size range represented 32% of total par issuance and 45% of total transaction count over the period, respectively. Transactions in the $50 million to $99.9 million range (74 issues) accounted for 17% of total par issuance of $29 million over the period, and 28 transactions with par amounts of $100 million or greater accounted for 15% of the total $29 billion par issuance between 2015 and 2022.
Pricing
YIELD
Several factors affect pricing and yields for bond issuances, including underlying market rates, tax policy, credit spreads, the presence and nature of the rating or credit quality, and the presence and nature of credit enhancement, when applicable. For aggregate issuance since 1998, the median fixed-rate charter school bond yield on the term bond with the longest maturity (averaging 28.5 years) is 5.50%. The median yield on bonds issued since 2015 is 4.75%. The median yield dropped to historic lows in 2020 (4.38%), and 2021 (3.64%), primarily reflecting the general interest-rate environment over this period. In 2022, driven by an increase in the benchmark MMD rate and widening credit spreads in the market generally, the median yield on charter school bonds registered the largest single-year increase in the sector’s history, increasing more than 170 basis points from 3.64% in 2021 to 5.38% in 2022.
Both the timing of issuance and the perceived credit strength of the offering, as indicated by the presence and nature of a credit rating, affect charter school borrowing costs. Yield and spread (see below) are higher for unrated and below investment-grade offerings, and lower for high-quality investment-grade offerings. In addition to market conditions, overall sector medians for yield, spread, and other pricing variables are influenced by the relative rating distribution of bonds issued in a given year or other reference period. For example, the share of the highest triple-A rated offerings as a percent of the rated universe increased from approximately 30% to 40% between 2018 and 2019 on a par amount basis. In addition to the overall low interest-rate environment, this contributed to the approximately 80 basis point drop in median yield for the sector as a whole from 5.4% in 2018 to 4.5% in 2019.
The trend in the median yield for unrated, below investment-grade rated (“Below IG”), and investment-grade rated (“IG Rated”) bond offerings between 2015 and 2022 is shown in the chart below. The pricing differential between bonds issued with an investment-grade rating and bonds with a below investment-grade rating varies year to year. Between 2015 and 2022, the difference in the median yield on investment-grade rated and below investment-grade rated offerings issued in the same year ranged from 59 to 143 basis points, with a median of 110. In other words, the median yield on investment-grade rated offerings was between 59 and 143 basis points lower than the median yield on below investment-grade rated bonds issued in the same year. The impact on yield of having any or a particular rating has been more volatile in recent years. For example, as shown in the table below, while a below investment-grade rating in 2021 would have generated 141 basis points in savings compared to an unrated offering, this spread narrowed to 72 basis points in 2022. Similarly, the relative value of any rating compared to an unrated offering, and of an investment-grade rating compared to a below investment-grade rating, has fluctuated significantly since 2020.
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SPREAD
The relative cost of capital for charter school bonds is measured by the spread to a benchmark rate representing highly rated triple-A municipal bonds. Charter school bonds are priced at a spread to the triple-A “MMD” index rate. The MMD rate represents the interest rate the highest rated triple-A borrower would expect to pay on a tax-exempt bond priced on the same day with the same maturity.8 The “spread” on a charter school bond offering is the interest rate differential measured in basis points between the yield on the charter school bond and the MMD rate for triple-A rated general obligation municipal bonds of the same maturity.
The median spread to MMD for all charter school bonds issued since 1998 is 232 basis points. The median spread on bonds issued since 2015 is slightly higher at 235 basis points. As the accompanying chart shows, spreads began to widen in 2008 in response to the global credit crisis, exacerbated by the collapse of bond insurance for charter school bonds—exceeding 330 basis points in 2009 and again in 2011. Spreads began declining in 2012 and have remained relatively steady since 2015 except for a spike in 2020. In 2021, the spread to MMD dipped below the historic median to 208 basis points, the lowest level since the credit crisis. This appears to be driven by an increase in triple-A rated par and a decrease in unrated par relative to 2020 and prior years, as will be discussed further in the Ratings and State Bond Credit Enhancement sections. The median spread to MMD for all charter school bonds issued in 2022 was 231 basis points, returning towards the historic median for the sector.
Like yields, spread to MMD varies considerably between investment-grade rated, below investment-grade rated, and unrated offerings. Between 2015 and 2022, investment-grade rated, below investment-grade rated, and unrated offerings priced at an average of 117 basis points, 215 basis points, and 295 basis points above MMD, respectively.
The pricing spread between these rating classes has also varied over time, particularly between below investment-grade and unrated offerings. For example, while a below investment-grade rating in 2015 garnered savings of 76 basis points compared to the median spread on an unrated offering, the same pricing differential nearly doubled to 139 basis points based on 2021 medians, indicating increased value placed on a rating of any kind in 2021 compared to 2015.
In contrast, the pricing differential within the rated universe between investment-grade and below investment-grade rated offerings narrowed to 54 basis points in 2021, which would also suggest increased benefit of a rating in any category, and less price sensitivity between investment-grade and below investment-grade rated offerings. The potential pricing benefit of obtaining a rating (and of the specific rating or range of expected rating outcomes) varies based on market dynamics and should be a key consideration for charter schools considering accessing the tax-exempt bond market.
The following chart presents the spread to MMD for each rating category within the investment-grade rated universe, as well as for unrated and below investment-grade rated bonds in the aggregate. For this chart specifically, please note the relatively small sample size of transactions within each investment-grade category (i.e., triple-A, double-A, etc.) as compared to larger transaction counts in the unrated and aggregate below investment-grade rated class. This leads to the appearance of greater volatility in spreads for investment-grade rated transactions, driven in some cases by a single transaction in a specific category which may or may not be representative. For example, there was one single-A rated offering in 2018. This happened to be a small transaction that benefitted from private credit enhancement and priced below the median spread for the highest triple-A rated bonds issued that year.
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COST OF ISSUANCE
In addition to the interest a charter school pays for its borrowing, like other municipal bond borrowers, charter schools must bear certain costs in order to access the market, including legal fees, trustee fees, underwriter fees (see below), and rating and credit enhancement fees9, where applicable. Costs of issuance, which are measured as a percent of the par amount of the bond, have been on a steady decline over the 25-year history of the sector. The median cost of issuance for all bonds issued from 2015 to 2021 is 3.72%, a significant reduction from the median of 4.62% for bonds issued prior to 2015. While overall costs of issuance have declined, costs routinely exceed the 2% cap on costs of issuance that can be funded out of the proceeds of a tax-exempt offering. In these cases, the charter school can issue a taxable series of bonds to fund the additional transaction costs.
Although costs of issuance vary based on the nature of each transaction (for example, costs specific to the issuer or jurisdiction), these fixed costs tend to fall within a relatively narrow range. The main driver of costs of issuance as a percent of par is the size of the transaction. As shown in the chart below, relative costs of issuance decline as par amount increases. For small transactions under $10 million, costs of issuance routinely exceed 6%. These costs are typically financed with bond proceeds (subject to the cap of 2% noted above) and should be factored into schools’ borrowing needs and affordability analysis, particularly for smaller transactions.
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UNDERWRITER'S DISCOUNT
The underwriter’s discount is a component—typically the largest and most variable component—of total costs of issuance. The underwriter’s discount is the fee paid to the underwriter to structure, price, and market bonds to investors, expressed as a percentage of the par amount of the bond. For the universe of transactions with available data on underwriter’s discount, the fee ranged from less than one tenth of one percent to over 6%, with a median of 1.50% for aggregate issuance since inception. The median underwriter’s discount has come down substantially since the early years of the sector, when charter school bonds were new to the market and more difficult to place with investors. The median underwriter’s discount for transactions issued between 2015 and 2022 was 1.25%.
Fees are typically higher for unrated or below investment-grade rated transactions, as these transactions are considered harder to place with investors. Conversely, the underwriting fee is generally lower for investment-grade rated credits, as shown in the chart below. Similar to pricing spreads between low investment-grade rated and unrated offerings, the cost differential in underwriting fees increased from effectively zero in 2015 to a spread of 18 basis points in 2021. Despite being a relatively small overall cost input, the difference in underwriting fees between low investment-grade rated and unrated offerings in 2021 amounts to $35,000 on a hypothetical $20 million bond offering.
Ratings
Approximately half of all charter school bonds were rated at issuance by one of the 3 major rating agencies: Fitch, Moody’s, and S&P. Of the 920 rated transactions, 623, (68%) were rated investment-grade at the time of issuance.10 This includes a significant number of “enhanced” offerings, i.e., those that utilized third-party credit enhancement to increase the rating on the bond (see State Bond Credit Enhancement section for further explanation). As shown in the accompanying pie charts, the percentage of rated par is higher than the percentage based on number of transactions, as many of the rated transactions were for large par amounts issued on behalf of charter school networks. The same is true with respect to the percentage of investment-grade versus non-investment-grade ratings: bonds with investment-grade ratings represent a larger share of total par than their corresponding share based on transaction count.
Within the universe of rated transactions since 1998, the most common initial charter school bond rating is in the triple-B investment-grade category, as detailed in Appendix B: Long Term Bond Rating Scales. Based on the 920 rated offerings through year-end 2022, 335 offerings, or 36%, were in the triple-B category. While still the dominant rating category based on transaction count, the share of triple-B rated offerings within the rated universe as of 2022 (36%) is down 10 percentage points since last reported in LISC’s 2015 Bond Study based on then-available issuance data from 1998 through 2014.
In LISC’s 2015 Bond Study, author Wendy Berry identified an emerging shift: for the first time in the sector’s history, in 2014, triple-A was the most common rating in terms of the par amount issued, with $432 million in triple-A rated par issued, representing 36% of total 2014 rated issuance. This change was wholly attributable to charter schools in Texas gaining access to credit enhancement through the state’s triple-A rated Permanent School Fund (PSF) in 2014, which allows eligible charter schools to access the bond market based on an “enhanced” rating equal to the rating of the PSF. As shown in the accompanying charts, the shift in rating distribution in 2014 driven by access to the Texas Permanent School Fund has evolved into a multi-year national trend of significant triple-A rated issuance.
The impact of charter schools gaining access to the Texas PSF is noteworthy for its scale and is unique in that it attaches the highest possible triple-A investment-grade rating to the charter school bond. At the time of publication, Texas is one of 5 active state-sponsored charter school bond credit enhancement programs that increase the rating on charter school bonds. The shift in rating distribution toward high-quality investment-grade rated offerings driven by access to state bond credit enhancement programs is among the more notable developments in the charter school bond sector over the past decade. State bond credit enhancement programs such as those in Texas, Colorado, Utah and Idaho restored access to credit enhancement for eligible schools in those states in the aftermath of the 2008–2009 credit crisis. We examine the impact of state credit enhancement programs in greater detail in the State Bond Credit Enhancement section.
7. Securities Industry and Financial Markets Association (SIFMA). (2022). 2022 Capital markets fact book (pg. 44). https://www.sifma.org/wp-content/uploads/2022/07/2023-SIFMA-Capital-Markets-Factbook.pdf.
8. Spreads referenced in this study are calculated from published average 30-year MMD rates and are averaged for various analyses (year to year, within rating categories, etc.), consistent with our intent to demonstrate general sector trends as opposed to the specific pricing dynamics of each offering. For example, we calculate spread based on the yield differential to the 30-year MMD rate for the longest maturity subseries, regardless of its term (which may be shorter or longer than 30 years), and without considering that the yield on the longest maturity subseries may not be a representative yield for the overall offering. Spread to MMD, as used in this report, is an approximation. The actual spread to MMD on an individual bond offering is determined based on the daily MMD rate for bonds priced on the same day with the same maturity.
9. Fees and other costs associated with state bond credit enhancement (such as deposits to a debt service reserve fund) are typically a separate line-item in the Sources and Uses of Funds in the Official Statement for enhanced bond offerings. To maintain a consistent methodology, we only include in our data the costs labeled “Costs of Issuance” in the Official Statement.
10. The number of transactions for which the bond rating could be confirmed in municipal data systems is 1,916. It is likely that the vast majority of transactions without available rating data were privately placed offerings that would not have been rated, which would reduce the percentage of rated transactions relative to our analysis. In other words, the analysis likely overstates rated transactions as a percentage of total transactions.