Transcript Program-Related Investments

2010 National Charter Schools Conference
Program-Related Investments
& Facilities Financing
June 30, 2010
Adam Porsch, Bill & Melinda Gates Foundation
Elise Balboni, Local Initiative Support Corporation
Annie Donovan, NCB Capital Impact
Lisa Richter, GPS Capital Partners, LLC
Bill & Melinda Gates Foundation
Proposed Charter School Financial Sustainability Toolkit
•
Financial Engineering Services
–
•
Financial diagnostic services, due diligence, technical assistance, knowledge dissemination,
peer-to-peer networks, relationship management, etc.
Growth Capital Support and Analytics
–
–
•
Growth capital support, attract new investors to the education field.
High net-worth donor pools (wealth aggregation) dedicated to specific charter schools and
initiatives.
Program-Related Investments and Alternative Investments
–
–
PRIs: (1) Credit enhancement to backstop tax-exempt bonds; (2) Low-cost loans to support
short-term development costs and to subsidize rent while cash-strapped schools ramp up
their student populations; (3) equity and equity-like investments.
Alternative Investments: New Market Tax Credits, etc.
•
Advocacy to enable supportive policy environment
•
All four components will help to scale high-performing grantees while enabling a sustainable,
2
efficient capital market to support long-term, affordable growth.
Academic and Financial Performance
Opportunity: Increase Bond Access for High Quality Charters
High
High Performance,
High Growth CMOs
and Charter
Schools
Charter School/
Bond Market
Objectives:
Enhancement leads
to Increased access
Low
High
Low
Access to Tax-Exempt Bond Market
3
• Focus on charter
schools that are high
performing with low
current access to the
tax- exempt bond
market
• Some charter schools
in the upper-left box
have previously
accessed the bond
market but cannot
under current market
conditions
• Short-term
enhancement to
further engage the
bond insurance market
and commercial
investors
BMGF PRI Program
• The Bill & Melinda Gates Foundation is seeking to improve charter school access to
the tax-exempt bond market to further the expansion of high-quality public
charter schools.
• To date, $38 million in program-related investments (PRI) has been committed
within the Education group: $30 million for the Houston Bond Credit Enhancement
Program and $8 million for the Aspire Credit Enhancement Program.
• These investments are part of a foundation initiative announced in 2009 to
commit a total of $400 million in PRIs over a two-year period to deepen the impact
of the foundation’s work through non-traditional means.
• PRIs can take the form of low-interest loans, loan guarantees and equity
investments that leverage the foundation’s balance sheet to secure financing for
select organizations and programs that fall within its core focus areas: global
development, global health and U.S. program, which includes education.
4
Charter School Finance Market
• Facilities finance customized to growth phases: start-up (years 0 – 2), early stage
(years 3 – 6) and growth (years 7 and after).
• Start-ups may seek tenant improvement loans of as little as $50 thousand for
leased facilities, before being ready to purchase or construct a permanent facility.
• Growth stage includes CMOs; financing needs may approach $100 million per
project for multi-school campuses, requiring tax-exempt bond financing.
• Advisory services needed throughout growth process, to guide decisions on when
to lease versus buy facility, and how to find and develop a facility—including a
green facility.
5
Charter School Finance Market
• Sources of capital:
 CDFIs for start-up and early stages; bond market for growth.
 Banks may lend to charters directly (rarely), or indirectly via major CDFI
investments.
 Foundations are sources of charter financing, through some direct lending as
well as major CDFI investments.
 Working capital as well as facilities finance now needed, given state budgets.
6
Opportunity: Charter School Bond Market Savings
Table 2 - Potential Financing Cost Savings from Bond Rating Improvement
Savings from Bond Rating
Improvement
Annual
Savings
Savings per One Grade Improvement
Estimated at 50 basis points per
$10 million of Project Costs1
$50,000
Bond Term
In Years
30
Estimated Charter Sector Savings for
One Grade Rate Improvement on
30 Add’l Projects @ $10 million each2
$1,500,000
30
Project
Savings
$1,500,000
$45,000,000
1Estimate of 50 basis point savings per bond rating grade improvement based upon 2008 interviews with various bond
underwriters, buyers and advisors.
2 On average, there were 30 rated bond issues per year between 2002 - 2006. Assuming average issue of $10 million
and savings per issue of 50 basis points or $50,000 per year, sector savings would be $1,500,000 per year. Savings
over the thirty-year life of each year’s bond issuances would be $45,000,000.
7
Tax-Exempt Bond Market
Between 2007 and 2009, the use of tax-exempt financing, both rated and unrated,
for charter schools declined dramatically.
Rated Charter School Bond Issuance
$800
40
37
$700
35
$676
$600
$500
21
$400
25
22
17
17
16
13
$300
10
10
$233
3
$153
$166
$164
$280
$270
$182
5
$0
0
1999
2000
2001
2002
2003
2004
Par Amount ($ Millions)
8
10
$190
$102
$10
20
15
10
$200
$100
30
2005
2006
2007
2008
Number of Issues
2009
Tax-Exempt Bond Market
Breakdown & Performance of 176 Rated
Charter School Bond Issues
Unenhanced
(96)
55%
Letter of
Credit
(21)
12% Insurance
(25)
14%
Insurance/
MO Pledge
(23)
13%
Other
(5)
3%
9
MO Pledge
(6)
3%
 1 payment default among the
176 bond issues, representing
0.1% of total par issued and
0.6% of number of issues.
 2 other cases of missed
payments in which there was
no loss to bondholders due to
credit enhancement built into
issuance.
 Adjusted default rate equal to
0.4% of total par issued or 1.7%
of the number of issues.
Program-Related Investments: Credit Enhancement
Below-Market Investments
Higher Risk
Lower Risk
Lower Risk
Higher Risk
Market-Rate Investments
Advisory
Services
10
Common
stock in
charter
school
bond
insurance
(possible
start-up)
1 Senior
• Sub-debt to
Bond issuer
• CDFI /
intermediary
• Charterfocused
developer
• Charter
School
NA1
• Linked
Deposit /
Funded
Loan
Guaranty
• Funded or
unfunded
pledge of
assets
• BMGF
initial focus
debt is supported by credit enhancement, which is subordinate or “junior” to it.
Source of Continuum: F.B. Heron Foundation Mission-Related Investing Continuum
Overview of Houston Bond Credit Enhancement Program
• BMGF’s $30 million PRI to serve as a guaranty for $300 million in tax-exempt bond
financing for high-quality CMOs in the Houston market.
• Participating borrowers and Local Initiatives Support Corporation (LISC) will
contribute a matching $30 million in first-loss funds.
• BMGF’s ten-year, unfunded guaranty is made to a separate LLC established by KIPP
Houston to serve as the guaranty entity, PHILO (Public, High-Impact, Low-Income,
Open-Enrollment) Houston, LLC.
• PHILO Houston, LLC will provide a limited guaranty on each bond issue at
enhancement levels which will obtain higher bond ratings and lower interest rates.
• The PHILO guarantees will be available on a pooled basis for each individual
borrower, with enhancement levels declining with aggregate issuance levels to
achieve a 5:1 ratio for the program.
11
Houston Program Structure
BMGF Guaranty
$30 Million
PHILO
Guaranty
$60 Million
Borrower Guaranty
$27 Million
LISC Guaranty
$3 Million
Trustees
KIPP
Bond
Investors
YES Prep
Tbd
Purchase
Price
P&I
Payments
Issuer
$300 Million
Bond Proceeds
P&I
Payments
CMO Borrowers
KIPP
12
YES Prep
Tbd
KIPP Houston Issuance
KIPP, Inc.
$66,865,000
Education Revenue Bonds
Tax-Exempt Series 2009A ($65,175,000)
Taxable Series 2009B ($1,690,000)
La Vernia Higher Education Finance Corporation
Pricing Date: October 28, 2009
Dated Date: November 19, 2009
Maturity Range: 2010-2044
Use of Proceeds:
Finance charter school facilities for 14 schools
on 7 campuses.
PHILO Guaranty: $20 million (30%)
$9 million in cash from KIPP
$1 million in cash from LISC
$10 million guaranty from BMGF
Senior Managing Underwriter: RBC Capital Markets
Financial Advisor: Coastal Securities, Inc.
Bond Counsel: Vinson & Elkins LLP
Underwriters Council: Andrews Kurth LLP
13
 BBB rating from Fitch and
Standard & Poor’s.
 Largest charter school bond
issue sold in country since mid2008.
 Orders of $211 million from
both retail and 18 institutional
investors.
 Overall interest rate of 6.28%.
 Estimated 50 bp savings from
credit enhancement, or $10
million over the life of the
bonds.
Overview of Aspire Credit Enhancement
• BMGF’s $8 million PRI combined with another $9 million in credit enhancement to
serve as a guaranty for $93 million in tax-exempt bond financing for high-quality
charter schools with Aspire Public Schools.
• BMGF’s ten-year, unfunded guaranty is made to a separate LLC established by
Pacific Charter School Development Corporation to serve as the guaranty entity.
• Total $93 million issuance with Aspire Public Schools.
14
Structure for Aspire
BMGF Guaranty
$8 million
PCSD, LLC
$17 million
Schwab Foundation
$8 million
NCBCI
$1 million
Issuer
Bond
Holders
Trustee
Pacific College Prep
Titan
Junior Collegiate
Port City
Langston Hughes
Alexander
Millsmont Secondary
Lionel Wilson
EPAPA
School Operations
15
slide 15
Aspire Public Schools Issuance
Aspire Public Schools
$93,295,000
School Facility Revenue Bonds
Tax-Exempt “Series 2010 Bonds”
California Statewide Communities Development
Authority
Pricing Date: March, 2010
Dated Date: March 25, 2010
Maturity Range: 2020-2046
Use of Proceeds:
Finance charter school facilities for 7 schools
on 9 campuses.
PCSD, LLC Guaranty: $17 million (18%)
$1 million in cash from NCB Capital Impact
$8 million guaranty from Schwab Foundation
$8 million guaranty from BMGF
Senior Managing Underwriter: RBC Capital Markets
Bond Counsel: Orrick, Herrington & Sutcliffe, LLP
Borrower’s Counsel: Musick Peeler & Garrett, LLP
Underwriter’s Counsel: Eichner & Norris, LLP
16
 BBB rating from Fitch.
 Oversubscribed from both retail
and institutional investors.
 Overall interest rate of 6.23%.
 Estimated savings from credit
enhancement of $11.8 million
over the life of the bonds.