CHARTER SCHOOL FACILITY FINANCE OVERVIEW

PRESENTED BY:

Scott RolfsManaging Director and Group Head414-978-6576srolfs@ziegler.com

B.C. Ziegler and Company | Member of SIPC & FINRA

August 2, 2012

• Ziegler Overview• Should We Buy or Rent?• How can we finance the

purchase/construction?• Tax-Exempt Bond Market Dynamics• Other Considerations when borrowing• Questions

TOPICS FOR DISCUSSION

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PREMIERE INVESTMENT BANK FOR NON-PROFITS

Key Statistics• Founded in 1902• Chicago headquarters• 22 regional offices• Expert financier for

charter schools and private K-12 schools

Our MissionAdvancing health, wealth

& well-being through tailored financial solutions

Underwriter of $2.5 billion of financing per year for non-profit schools, senior housing providers, hospitals and churches

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• #1 underwriter of charter school bonds in 2011• High volume/transaction underwriter

OUR EXPERIENCE

Source: Thomson Financial, January 1, 20124

Senior Managing Underwriter Senior Managing Underwriter

Charter School Revenue Bonds Charter School Revenue Bonds

Rank Underwriter # of Issues $ Million Rank Underwriter # of Issues $ Million1 Ziegler Capital Markets 8 163.5 1 RBC Capital Markets 54 683.02 RBC Capital Markets 9 120.8 2 D A Davidson & Co 69 500.73 Piper J affray & Co 16 103.3 3 Robert W Baird & Co 42 346.84 Robert W Baird & Co 7 95.7 4 Piper J affray & Co 50 334.25 D A Davidson & Co 13 67.6 5 Ziegler Capital Markets 16 260.46 Morgan Keegan & Co Inc 2 64.0 6 PNC Financial Services Group 25 249.97 PNC Financial Services Group 4 60.8 7 Morgan Keegan & Co Inc 5 180.68 Lawson Financial Corp 3 19.9 8 Wachovia Securities 14 155.09 Merchant Capital LLC 2 18.9 9 A G Edwards & Sons Inc 13 131.410 Zions First National Bank 3 18.1 10 Dougherty & Company LLC 16 110.2

1/1/2011 - 1/1/2012 1/1/2007 - 1/1/2012

ZIEGLER CHARTER SCHOOL FINANCE HIGHLIGHTS• Sole underwriter of the Renaissance Charter School Series 2011; the second largest charter school

transaction issued to-date• Underwrote the first charter school bond in Louisiana in 2011• Underwrote the first investment-grade charter school bond issue in California in 2006• Underwrote the first rated charter school bond issue in Arkansas in 2010• Underwrote the first LOC-enhanced bond issue for a charter school in North Carolina in 2007

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FACTS ABOUT CHARTER SCHOOLSMANAGEMENT STRUCTURE FACILITY OWNERSHIP

ADEQUATE YEARLY PROGRESS LOCALE

EMO13%

CMO13%

Freestanding74%

Rented65%

Owned30%

No Lease5%

Making AYP62.6%

Failing AYP37.4%

City55.0%

Suburb21.1%

Town7.8%

Rural16.1%

Sources: National Alliance for Public Charter Schools, Center for Education Reform 6

• First decide whether it makes sense to lease or own property

• Leasing advantages• Less upfront costs• Available to younger schools• Flexibility to relocate• Many Charter School Developers that specialize

in acquiring and leasing buildings • Buyer beware as lease terms can vary greatly.

Consult an attorney before signing any documents

SHOULD WE RENT OR BUY?

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• Ownership Advantages• Equity building over time• No risk of lease renewal• Ability to renovate without permission from

landlord• Owning your own site can lead to a better

chance of long-term success (Kaufmann Foundation Study based on data from The Center for Education Reform). Closure rates higher for schools that leased property

• Ownership/Pride for Staff, Students and Alumni• Do not over-leverage (20% of budget to

facilities)

SHOULD WE RENT OR BUY? (CONT)

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• Bank Loan• New Markets Tax Credit• Tax-Exempt Bond issue• Private Note from Seller or other

HOW CAN I FINANCE A BUILDING ACQUISITION?

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PUBLIC FIXED-RATE BONDS SHORT-TERM BANK LOANOVERVIEW Long-term fixed interest rate bonds issued

through a conduit issuer (tax-exempt) or directly by the borrower (taxable)

Medium-term, fixed-rate or fixed spread variable rate mortgage with 1 to 7 year rate-locks

Most common financing structure for mature charter schools

Single “investor” typically a bank or development corporation

PROS Historically low cost interest rates Ability to take advantage of steep yield curve

Can include interest-only periods during enrollment ramp up

Low cost of issuance; but usually recurring with renewal

Capitalized interest for new construction Ability to structure quickly

Can finance cost of issuance of debt to eliminate out-of-pocket spending Non-public issuance

Long-term fixed pricing facilitates long-term planning Available to younger schools

No reliance on bank/lender to renew loan

  Flexible covenant structure permits schools to pursue opportunities in the future  

CONSPublic disclosure requirement of financial and operating performance

Renewal risk (3-7 year term) – lending partner may not have capacity at renewal time to extend lease or loan. Also Loan to Value issues (“LTV”)

Conduit issuer required to obtain tax-exemption  

Interest rate risk – lease/loan could become difficult or impossible to afford in the future if lease/loan rates riseCovenant structure may prohibit pursuit of growth opportunities

PROS & CONS OF MOST COMMON FINANCING OPTIONS

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INTEREST MOVEMENT

40-YEAR HISTORICAL INTEREST RATE | 5-YEAR TREASURY BONDS

Source: Bloomberg

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Topic 3

BOND MARKET UPDATE

CHARTER SCHOOL BONDS HAVE GAINED MARKET ACCEPTANCE

• Issuance history indicates that charter school bonds have gained broad market acceptance

• Municipal bond issuance increased from $35 million in 1998 to a peak of more than $1 billion in 2007

• Market disruption took a toll on issuance in 2008 and 2009, but 2010 and 2011 showed a strong recovery

• 2012 issuance through Q2 is $433 million compared to same period last year when volume was $445 million

Sources: EMMA, Bloomberg, Thomson Financial SDC 13

Charter School Financings by Year through 6/30/12

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24 2734 38 37

5259

82

118

54

34

104

85

41

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

$ in

Mill

ions

Par # Series

• Municipal Market Data (“MMD”) is the “AAA” tax-exempt benchmark interest rate for municipal bonds− Tax-exempt charter school interest rates are priced in relation to this rate

• Key drivers of the market volatility:− European sovereign debt crisis− Investor fear of systemic municipal debt downgrades and the potential for

defaults− Municipal bond fund cash flows that have fluctuated with movements in

equity markets− Market fears of a “double-dip” recession in the US

Sources: Bloomberg, Municipal Market Data

TAX-EXEMPT FIXED RATE MARKET DYNAMICS

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30yr MMD 1992 to Present

2.50%

3.50%

4.50%

5.50%

6.50%

7.50%

MMD 20-Year Avg 10-Year Avg

30yr MMD Last 12 Months

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

MMD 20-Year Avg 10-Year Avg-0.25-0.20-0.15-0.10-0.050.000.050.100.150.200.25

Municipal Bond Fund Cash Flow (in Millions)

($1,500)

($1,000)

($500)

$0

$500

$1,000

$1,500• MMD currently at 2.90%; all-time low of

2.79% occurred on 7/26/2012― Volatility in U.S. treasury and municipal

rates due to market uncertainty:• Federal Reserve Operation Twist

and Quantitative Easing• U.S. budget deficit issues• European sovereign debt concerns• Supply/demand imbalances

TAX-EXEMPT FIXED RATE MARKET DYNAMICS

Source: Bloomberg, July 20, 2012 15

Current 2.90%10-Year Avg 4.40%20-Year Avg 4.96%20-Year Max 6.95%20-Year Min 2.90%

RATING AGENCIESWhat is a rating?

• A “grade” assigned to your organization and the related debt

• The grade is based on an evaluation of your organization by a third party rating agency

• Investors rely on the grade to give them some tangible measuring stick when evaluating bonds

• Some investors can only purchase higher graded bonds (i.e. investment grade)

• Three primary rating agencies in the US» Standard and Poor’s» Fitch» Moody’s

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• AAA: An obligor rated 'AAA' has extremely strong capacity to meet its financial commitments. 'AAA' is the highest issuer credit rating assigned by Standard & Poor's.

• AA: An obligor rated 'AA' has very strong capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree. Includes:

• A: An obligor rated 'A' has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.

• BBB: An obligor rated 'BBB' has adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.

• BB: An obligor rated 'BB' is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitments.

• B: An obligor rated 'B' is more vulnerable than the obligors rated 'BB', but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments.

• CCC: An obligor rated 'CCC' is currently vulnerable, and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments.

• CC: An obligor rated 'CC' is currently highly vulnerable.• C: highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations• CI: past due on interest• R: An obligor rated 'R' is under regulatory supervision owing to its financial condition. During the pendency of the regulatory

supervision, the regulators may have the power to favor one class of obligations over others or pay some obligations and not others.

• SD: has selectively defaulted on some obligations• D: has defaulted on obligations and S&P believes that it will generally default on most or all obligations• NR: not rated

Source: Standard and Poor’s

S&P RATING DEFINITIONS

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CONSIDERATIONS FOR A RATING• Political climate

• Collective bargaining

• Strength of authorizers— How many?— Conflict with school districts?

• State funding— Equitable with traditional public schools— Annual increases— Facilities funding allotments

• Charter renewal and appeal process

• Managed growth—state cap

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DEMAND: WHAT MAKES YOUR SCHOOL SPECIAL?• Documented waitlist

• History of consistent enrollment growth

• Student attendance and turnover

• Teacher turnover rate - Relationship between administration and teachers

• Academic Excellence— State test scores & state accountability rating— Federal requirements – NCLB— Type of curriculum

• Competition (Is Charter v. Charter competition in your market yet?)

• Classroom size19

OTHER CONSIDERATIONS WHEN BORROWING

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FINANCIAL COVENANTS

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• Debt service coverage ratio = usually 1.1x – 1.2x

• Liquidity Covenant− 30 to 45 days cash on hand and/or− Unrestricted cash balance of 5% of prior year operating expenses

• Additional bonds test = usually with historical debt service coverage of 1.25x and projected coverage of 1.25x including proposed debt

• Covenant violation triggers management consultant

MITIGATING CONSTRUCTION RISK

• Primary goal is to build the building on time and on budget.

• Permitting and necessary government approvals

• General contractor experience

• Guaranteed maximum price contract— Liquidated damages— Payment and performance bonds— Contingencies—usually 3-5% of project cost

• Disclosure of Construction Reports

• Environmental Study (any environmental risks present?)

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TOP TEN TRAITS FOR LOWER RATES1. Waitlist Maintain accurate waitlist and purge annually

2. Enrollment History Ability to show consistent demand in prior years

3. Academic Performance How do test scores compare to the district, AYP results

4. Competition Is your program or curriculum unique

5. Charter Renewal One successful charter renewal “under the belt”

6. Board Composition Diversified backgrounds that contribute to the school’s success

7. School Management Talented management team with clear succession plan

8. Financial Performance History of excess revenues and growing fund balance

9. Liquidity A strong balance sheet will lower your cost of capital

10.Debt Ratios Debt burden below 20%, average debt per student below $15,000

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QUESTIONS?

FOLLOW UP CONTACT INFORMATIONSCOTT ROLFS

MANAGING DIRECTOR AND GROUP HEADRELIGION & EDUCATION FINANCEZIEGLER INVESTMENT BANKING

PH: 800 797 4272DIRECT: 414 978 6576

E-MAIL: SROLFS@ZIEGLER.COMWEB: WWW.ZIEGLER.COM

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