Public Charter Schools Borrowing With Tax-Exempt Bonds, Second ...

chapter six
Credit Considerations
Investors who will buy the public charter school’s bonds must first analyze the
transaction to determine if they are interested, and if so, how much interest earnings
on the bonds is necessary to induce them to invest. This analysis focuses on a number
of characteristics of the school, including its authorizing statutory scheme (length
of charter and process for revocation), organizational structure, program and market
position, management team and operating history. In addition, the terms of the
contractual arrangement between the school and its bondholders form a key part of
the analysis. Generally, a public charter school is viewed as more creditworthy the
higher it ranks in light of these various characteristics, and a transaction is viewed as
more secure the greater protections bondholders enjoy under the terms of the bond
documents. Together, these transaction characteristics (or credit considerations)
influence the cost of capital (or interest rates) associated with the tax-exempt bonds.
Investors rely on a variety of sources of information in assessing the public
charter school’s creditworthiness or risk profile and in making their investment
decisions. These may include, (a) the school’s financial statements and operating
information (including asset values and unusual positive or projected cashflows),
(b) academic research and press coverage regarding the school, (c) information
regarding the chartering authority, its legal framework and relationship with the
school, (d) assessments and evaluations by the chartering authority, if any,
(e) physical inspection of the school site and operations, (f) the school’s primary
market disclosure, and (g) the analyses of third-party credit rating agencies, if
applicable. Most of this information is already in existence when a public charter
school begins the process of a bond financing, with the exception of the primary
market disclosure (or “official statement”) and the credit rating. At the time
a transaction is commenced, counsel will work closely with the school to prepare
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