MuniLand - Charter Schools, Texas Permanent School Fund and Credit Enhancements

This week SNWAM bought bonds for some accounts backed by a national charter school organization named KIPP (Knowledge is Power Program). We specifically targeted allocating these bonds to our  Human Impact and Profit (HIP) strategies because of their high impact score and credit enhancement. KIPP is a network that targets under-resourced communities throughout the nation. The ratings agency  S&P rates these bonds BBB, or at the low end of the investment grade spectrum. There are two main credit concerns with charter school bonds. One, charter schools are typically less transparent in their financial reporting than traditional public schools. Two, there is a mismatch between a charter school’s operating license and the maturity of their bonds. They must periodically reapply with the local education authority or risk revocation of their operating license, hampering charter schools’ ability to make timely interest payments.

So why would SNWAM buy such low-rated bonds with an uncertain operating future and less  transparency?  Because of the Texas Permanent School Fund. In 2013, the Texas Legislature promulgated  a law availing charter schools of the guarantee of the State’s Permanent School Fund. The Permanent School Fund (PSF) is a credit enhancement program sponsored by the State of Texas, but is a separate and distinct component unit with its own assets. Moreover, these particular KIPP bonds were issued through the Houston, TX Higher Education Finance Corporation, which allows them to receive the credit enhancement of the PSF program. The PSF has an impressive balance sheet. It earns AAA Rating from credit rating agency  and the highest SNWAM rating. In all, we liked these particular bonds because of KIPP’s high impact score, the credit enhancement of the PSF program and the attractive level of the offer.