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

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enhancement, the public charter school’s bonds are sold with the higher credit rating of the letter of credit provider, and garner a lower cost of borrowing. Because variable-rate bonds do not guarantee a certain rate of interest over time, but by definition periodically change interest rates, such bonds are usually more suitable for larger, more sophisticated tax-exempt borrowers (such as large hospitals or health care networks). However, public charter schools have used letters of credit issued by local, regional and national banking institutions to enhance their tax-exempt bonds for transactions ranging from under $10 million to over $20 million. Typically, banks issuing a letter of credit will require collateral assets to secure the letter of credit, in some cases in an amount equal to the principal amount of the bonds secured by the letter of credit. A variety of financial instruments (beyond the scope of this booklet) can be used in combination with letter of credit-backed variablerate tax-exempt bonds to mitigate the risk over time of fluctuating interest rates. The motivation to use variable-rate bonds stems from the traditionally significant lower overall borrowing costs associated with such financing arrangements, as compared with traditional fixed-rate bond structures. Because it is usually more expensive to borrow money for a longer period of time, long-term fixed rate bonds usually have an overall borrowing rate that is higher than a variablerate financing. While variable-rate bonds can be structured to amortize principal over a long-term (20 – 30 years), they reflect the interest rate for the short-term period between the time an initial rate is set and the time the initial rate is reset to a new rate. Variable-rate bond interest rates can be structured to reset daily, weekly, yearly or less frequently, and bear interest rates reflective of the corresponding interest rate reset periods. For example, the school could be paying interest at a weekly borrowing rate for bonds that mature in 25 years. In addition to variable interest rate exposure, risks associated with letter of credit-backed variable-rate tax-exempt bonds include: (a) letter of credit renewal risk, and (b) letter of credit provider bankruptcy. Because letters of credit are typically short-term commitments, the school must plan for either renewal or replacement of the letter of credit prior to its expiration date. There is a risk that the existing provider will not renew, or that no replacement provider will be willing to step forward. In addition, prior to the expiration of a letter of credit, a letter of credit provider could become insolvent, or otherwise become unable to honor its obligations under the letter of credit. 36
B. Other Guarantors and Credit Enhancement Vehicles. As the public charter school movement enters its third decade, and while access to facilities financing remains a challenge, the need for non-traditional forms of credit enhancement has gained prominence. Limited credit enhancement programs for public charter school tax-exempt bonds have been developed by federal 27 and state 28 agencies and private institutions, 29 which may serve as models for future program development. Several reform-oriented charitable foundations have invested substantially in the public charter school movement, impacting charter facilities policy development broadly as well as supporting high performing individual schools. Such foundations could leverage their financial resources in a variety of ways to enable public charter schools to access tax-exempt financing (that might not otherwise be eligible) and lower the school’s borrowing cost. Examples include: (a) guaranteeing a school’s timely debt service payments (akin to a bond insurer), (b) purchasing a subordinate portion of a project’s tax-exempt debt (thereby deleveraging the school’s balance sheet from the tax-exempt bond investor’s perspective), and (c) pledging a pool of funds to perform either of these functions for a regional or state-wide portfolio of facilities projects. One example of this type of innovation has been deployed in a small number of tax-exempt financings, where a large charitable foundation extended a guarantee to bondholders in the form of a program related investment (or “PRI”) loan. 30 In line with example (a) above, the public charter school’s payment obligations were supported by the contractual obligation of the foundation to issue a payment to bondholders in the event of a shortfall in funding of the school. The payment by the foundation is derived from a PRI loan, which is eventually repayable to the foundation, so that the foundation may continue to redeploy its capital for its charitable purposes. The alignment of PRI loan guarantees with the full principal amount and term of a tax-exempt bond financing represents the greatest benefit to bondholders, and the greatest likelihood of lowering the overall borrowing cost for the school. Public Charter Schools Borrowing With Tax-Exempt Bonds, Second Edition 37
Page 1 and 2: Public Charter Schools Borrowing Wi
Page 3: Public Charter Schools Borrowing Wi
Page 7 and 8: chapter one Introduction The public
Page 9 and 10: chapter two Why Use Tax-Exempt Bond
Page 11 and 12: Tenure. Tax-exempt debt generally h
Page 13 and 14: Thus, although it is somewhat count
Page 15 and 16: of tax credits, as determined by Co
Page 17 and 18: chapter three Timing of Project Acq
Page 19 and 20: the school’s finances and operati
Page 21 and 22: chapter four Eligible Uses of Bond
Page 23 and 24: Properly drafted, it can be simple
Page 25: yield on the refunded bonds. Howeve
Page 28 and 29: it is advisable to consult bond cou
Page 31 and 32: chapter six Credit Considerations I
Page 33 and 34: competing public schools do not ser
Page 35 and 36: Each transaction is analyzed indivi
Page 37 and 38: chapter seven Investor Perspectives
Page 39 and 40: 5. Quality of Finance Team. By virt
Page 41: chapter eight Credit Enhancement Fo
Page 45 and 46: chapter nine Market Disclosure The
Page 47 and 48: sessions. Parties also conduct a
Page 49 and 50: data is presented in the final offi
Page 51 and 52: chapter ten Transaction Structure a
Page 53 and 54: A separate public entity is require
Page 55 and 56: chapter eleven Steps to Issuing Bon
Page 57 and 58: of the Official Statement that sets
Page 59 and 60: a separate law firm to serve as Dis
Page 61 and 62: chapter twelve Post-Issuance Compli
Page 63 and 64: agreements for comparable special l
Page 65 and 66: B. Disclosure Responsibilities Fail
Page 67 and 68: Contacts For further information ab

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