DALLAS — KIPP Inc. in Houston became the first charter school system in the state to price a bond issue competitively with a $77 million refunding backed by the Texas Permanent School Fund.
The competitive sale on April 14 was made possible by the triple-A PSF guarantee that only became available to charter schools in 2014, according to John Murphy, chief financial officer for KIPP.
"Our financial advisors and underwriters are pretty sure that KIPP is the first charter that's done that nationally," Murphy said of the competitive sale.
All previous charter bonds in Texas — even the 2014 refundings backed by the PSF — were priced through negotiation because of the lower credit quality of charter schools or the added variables of refunding.
"We were in kind of unchartered waters here, no pun intended," said David Holland, managing director for financial advisor U.S. Capital Advisors. "We didn't know what the reception for the chartered PSF would be, but we decided to test the waters. We thought we would get a broader and perhaps better reception."
The decision to go competitive was based on analysis of traditional school financings, Holland said.
"We noticed that for some reason, the competitive realm is getting what we consider better bids for these PSF transactions," Holland said.
With municipal rates at historic lows, the financial team also had to deal with negative arbitrage issues on the advance refunding, Holland said.
Standard & Poor's gives KIPP Houston an underlying rating of BBB, which is fairly typical of the charter school issuers. While the outlook on the underlying rating is negative, the outlook on the PSF is stable.
Since the PSF backing became available under 2013 legislation, credit-worthy charter school operators have been able to refund previously issued bonds with the state guarantee, dramatically lowering their borrowing costs.
KIPP's 30-year refunding bonds issued through the Houston Higher Education Finance Corp. earned a true interest cost of 3.837%, Holland said. RBC Capital Markets won the bid.
That produced net present value savings $8.7 million or 13.49%, he said.
Andrews Kurth attorney and partner Thomas Sage, a pioneer in the PSF-backed charter school arena, worked on the KIPP deal as bond counsel.
Charter schools in Texas are nearing the limits of the PSF backing approved by the 2013 Legislature. Under House Bill 3018 by Rep. Jim Murphy, R-Houston, the amount of charter school debt covered by the PSF could grow. Murphy's bill is scheduled for a committee hearing on April 16.
The Life School of Dallas was the first charter operator to issue PSF-backed debt on April 30, 2014. The school priced $92 million of new money bonds through negotiation with senior manager RBC on April 30. The bonds, issued through the Arlington Higher Education Finance Corp., were sold at a combined interest rate of 3.8%, net of the federal tax credit for the QSCBs. Eight other Texas charter school operators have issued PSF-backed bonds since then.
Traditional school districts in the state have been able to issue general obligation debt guaranteed by the Permanent School Fund since 1985.
The 2011 Texas Legislature extended the coverage to public charter schools with an investment-grade credit rating, but the first issue didn't come until 2014. Total enhancement available to Texas charter schools is capped at about 5% of the PSF's total available capacity, based on the number of students enrolled in the schools statewide.
The legislature in 2013 added coverage for refunding debt issued by charter schools. The refunding enhancement total is capped at 50% of the new-money charter school bonds with PSF coverage. Refunding issues must provide present value savings and cannot extend the maturities of the refunded debt.
The amount of PSF guarantee for new money authorized in 2014 was $727.4 million.
In addition to the PSF guarantee, KIPP Inc. is supported by the Philo Finance Corp., a separate 501(c)(3). KIPP can tap Philo's $39 million unrestricted resources to meet debt service requirements if needed, according to S&P.
"As KIPP Inc. grows into its current debt, we anticipate that operations, which are based on conservative budgeting, will be stressed and coverage will be achieved through the assistance of philanthropy," S&P analyst Luke J. Gildner wrote. "The short-term stress on operations may also affect an already-low liquidity position."
S&P anticipates a debt coverage ratio of about 1.3 times through its outlook period, with maximum annual debt service of $13.1 million in fiscal year 2016 tapering to less than $13 million in 2017.
"The debt burden, based on post-issuance MADS, is anticipated to decline to 12.1% of fiscal 2014 expenses and will continue to moderate in future years," Gildner said. "We calculate coverage conservatively and include subordinated debt, nonrated debt, and the federal subsidies."
KIPP Houston, which was founded in 1994, is the KIPP (Knowledge is Power Program) organization's largest region and operates 22 schools on nine campuses serving more than 11,500 students. Having previously operated under two separate charters, KIPP Inc. was approved by the Texas Education Agency in June 2013 to consolidate the two districts. The combined charter was renewed for a 10-year term in July 2013.
KIPP Inc.'s total debt outstanding is about $168.6 million, according to S&P. That includes $116.4 million in S&P-rated fixed-rate bonds. In addition, KIPP has $34.8 million of unrated debt in taxable qualified zone academy bonds and $17.4 million in taxable QSCBs, under which the federal government subsidizes interest expense as part of a federal tax credit bond program.
KIPP Inc.'s enrollment across the various campus locations is 11,522 for this school year, an increase of more than 7% from the previous school year and a 42% increase from just three years ago. KIPP Inc. wait list of about 11,824 students, represents 103% of total enrollment, for the 2014-2015 school year.
KIPP anticipates that enrollment will continue to grow by about 1,000 students in fall 2015, and to about 16,250 by fall 2019, for a 7% average annual growth rate.
"We understand that KIPP Inc. has adequate demand to expand into additional locations," Gildner said. "Enrollment under the charter is currently capped at 23,300."
