Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income

Charter School Bonds

Charter schools are an important component of educational alternatives for providing better K–12 education. However, the charter school sector has thus far had limited access to capital to fund its facilities and equipment. Given financial stresses faced by the federal and state governments, future capital funding for charter schools by these governments is expected to be limited. To counteract a funding lapse, a number of states have implemented debt financing authority for charter schools. As part of the authorization, adequate security features for the debt were established to allow for market access. Despite this, the operating and financial structures of charter schools make them one of the more risky sectors in the municipal debt market.

According to the Education Commission of the States, 40 states have legislation permitting charter schools. Currently, 26 states provide financing authority. Of these, five states (Arizona, Colorado, Michigan, Texas, and Utah) contain most of the estimated 375 schools with publicly issued debt. Bonds are usually structured as lease revenue debt of the school with the debt sold by an issuer that acts as a conduit.

Some common legal protections for debt holders include the following:

• Direct state aid intercept, usually from the state treasurer to the bond trustee.
• Debt service reserves to cover any temporary interruptions in pledged revenues.
• Mortgage on property and property appraisal to expedite the sale of the school ...