A charter school in San Antonio, Texas, is expected to close at the end of the year, jeopardizing $25 million of municipal bonds the institution borrowed just three years ago.
The school's board of directors decided not to appeal the decision, the filing said.
"While we're proud of our students' progress and growth, we recognize that our academic achievement results haven't yet reached the level our TGP community deserves," school superintendent Brian Sparks
Many charter schools across the U.S., which are privately run but taxpayer funded, are struggling as pandemic stimulus aid expires and the number of students falls because of a declining birth rate.
In January, the institutions made up half of the 20 borrowers who disclosed financial distress, according to a February research note from Municipal Market Analytics. Those indicators include missed targets for debt-service coverage or the amount of cash the schools have on hand.
The Gathering Place was required to maintain a debt-service coverage ratio of 1.1 and 45 days of cash on hand, according to bond documents. It missed both those conditions and was expected to hire a consultant to help right its finances, according to a Jan. 13 filing to bondholders.
Two other charter schools — Milestones Charter School in Arizona and Ascend Leadership Academy in North Carolina — also recently saw their debt-service coverage ratios slip.
"Inflation in recent years hasn't helped and last year, most of the stimulus money from Covid that may have helped offset those expenses largely went away," said Chad Farrington, co-head of municipal bond strategy at DWS Group. "Demographic headwinds are going to be a source of pressure in the years ahead — lower birthrates mean a lower pool of potential students to capture."
Nationally, charter schools have about $35 billion in outstanding debt and are among the riskiest securities in the muni-bond market. About 1.1% of the bonds are in default on principal or interest payments, according to data compiled by Bloomberg. From 1970 through 2023, the average 10-year annual default rate for municipal bonds rated by Moody's was 0.15%. Corporate bonds, which have lower ratings, had a 10.8% default rate over the same period.
The Gathering Place borrowed more than $25 million of unrated debt in 2022 through the Arlington Higher Education Finance Corporation to buy the school from a developer. Revocation of a charter typically leads to default.
One security due in 2042 last traded in December at 94.6 cents on the dollar, according to trade data collected by Bloomberg.
"Our student enrollment has been significantly lower than initially projected," wrote Sparks. "As a public school, our funding is directly tied to enrollment numbers, which impacts the resources we can allocate to our programs."
