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Providence Financial









MONTHLY NEWSLETTER:  OCTOBER 2005 ISSUE

FINANCIAL MARKET PARADOX FOR CHARTER SCHOOLS
BY BRENT VAN ALFEN, PROVIDENCE FINANCIAL COMPANY, INC.


I can barely remember when I was a teenager, but the things that I do remember are getting a bit distorted. In my mind (what is left of it) I was a legendary high school athlete; but in reality, I was barely good enough to get a uniform. As the old saying goes—“The older I get, the better I was.” One area where my memory is still intact and accurate is when I was dating my favorite girlfriend who is now my wife and still my favorite girlfriend. She kept telling me to stop kissing her, but then she was the one who started it up again! She will deny this, but it is true. To me, she was a paradox.

Today’s charter school financial markets are experiencing a somewhat similar paradox. While there are new participants entering the market, investors generally are getting more wary of charter school debt. As the charter school market matures, it is natural that there will be problems, both academically and financially, for many charter schools. These failures get an inordinate amount of attention as compared with the many outstanding charter schools in the country. These charter failures have serious ripple effects in the unrated bond market for charter school debt. Recently a charter school in New York failed, leaving a fairly large amount of bond debt in default. A new bond underwriting for a charter school in an entirely different part of the country went to market shortly after the failure in New York, and the underwriter had to raise the interest rate by 0.5% in order to sell the bonds. The markets were so nervous about charter schools, as a result of the New York failure, that the underwriter of the next bond issue had difficulty selling the bonds even at a higher rate.

While the financial markets are getting more wary of charter school debt and raising the bar for schools to qualify, there are many more underwriters and investors who are looking hungrily at this burgeoning market. Just during this past month, I have been contacted by two excellent sources of money looking at opportunities in the charter school market. As a result of the increased supply of investors and lenders being attracted to the charter school market, it has been reported that the average rate on charter school bonds is beginning to drop.

Another recent and very interesting development in the charter debt market is that the sources for enhancing the marketability of bonds are showing an interest in charter schools.

So here is the paradox. More investors and lenders want to get into the market while those who have been established for a while are getting nervous about the market. I have seen many segments of the financial markets go through this cycle. First, there are the enthusiastic early entrants who espouse the concept and theory of the market. As the market begins to mature, the better borrower candidates separate from the average to poor ones. Lenders and investors begin to recognize the attributes of excellence and the warning signs of failure. Sometimes, lenders and investors overreact for a time and turn down credits that would have been approved quickly in other times. Eventually, however, the markets stabilize in their evaluation criteria and the pricing follows. The potential borrowers will then know about what to expect in terms of credit criteria and the interest rates available.

Another recent and very interesting development in the charter debt market is that the sources for enhancing the marketability of bonds are showing an interest in charter schools. While the traditional rating agencies are generally still wary or negative in their attitude toward charter debt, credit insurance companies are starting to look at charter debt as a new and fertile market for their service. I am starting to work with a credit insurance company that, if they decide to get into the charter debt market, will have the effect to the charter borrower of dropping their interest rate up to 1.5% to 2%. Having credit insurance on a bond will change it from an unrated bond to a rated bond.


The charter school financial markets are in a very interesting state of change. On a macro basis, they are evolving slowly from a new, untested investment to a proven secure one. On a micro basis, it is very frustrating for a charter operator to know if he’s getting a good deal on a credit facility. This state of affairs makes it doubly important to have an experienced advisor assisting you to arrange your charter school’s facility financing. I happen to know someone in Utah who will do an excellent job for you, and he was a legendary high school athlete!
For information contact Brent Van Alfen, President, Providence Financial Co., Inc.
801-299-8555, brent@providencefinancialco.com