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Providence Financial












MONTHLY NEWSLETTER:  DECEMBER 2008 ISSUE

THE CURRENT MARKET ENVIRONMENT
FOR FINANCING CHARTER SCHOOL FACILITIES
BY RICK VAN ALFEN, CPA
PROVIDENCE FINANCIAL CO., LLC



Look, look at this. We got Hurricane Grace moving north off the Atlantic seaboard. Huge... getting massive. Two, this low south of Sable Island, ready to explode. Look at this. Three, a fresh cold front swooping down from Canada. But it's caught a ride on the jet stream... and is motoring hell-bent towards the Atlantic. What if Hurricane Grace runs smack into it? Add to the scenario this baby off Sable Island, scrounging for energy. She'll start feeding off both the Canadian cold front... and Hurricane Grace. You could be a meteorologist all your life... and never see something like this. It would be a disaster of epic proportions. It would be... the perfect storm. - Todd Gross, TV Meteorologist in the movie “The Perfect Storm.”

It may be an over-used metaphor, but it is a good one relative to the current credit environment. I feel like I’m on that fishing boat (though I probably don’t look as good as George Clooney).

You have all seen the dire economic reports in the news. There is blood in the streets. The stock market has lost a decade of expansion, banks are not lending, economic indicators are grim and all of the money Washington is throwing at the problem doesn’t seem to be helping. What does this mean for charter school facility financing? Here’s my perspective.

On September 15, Lehman Brothers’ failure started a chain reaction in the credit markets of historic proportions. Due to losses on collateralized debt obligations and mortgage-backed securities caused by failures of underlying mortgage loans, other gold-standard Wall Street firms like Merrill Lynch and Citigroup hit the same brick wall as Lehman. Because banks had to write down the value of these investments, their required capital levels became dangerously low. This forced some banks, such as Wachovia, into shotgun marriages with stronger banks and caused others to go to China or the Middle East begging for capital infusions. Who could have imagined these firms would go from being the most respected capital institutions to sitting on the precipice of failure in less than a year? Banks began hoarding cash and stopped lending to shore up their capital position and de-leverage. Financial institutions became wary of other firms that were counterparties to financial instruments or short-term loan recipients, so interbank lending stopped.

Hopefully, we will see investors return to the market in the first quarter of next year, which will cause interest rates to decrease….


Most charter schools are financed by selling tax-exempt bonds to large mutual funds. In a precarious economy and with unprecedented losses in many financial instruments, there has been a massive flight to safety with funds and individual investors selling assets in favor of holding cash and treasuries. Funds have also experienced significant redemptions, some caused by individual investors’ receiving margin calls on plummeting stock market investments. So, typical investors in charter school bonds are not buying and many are selling these bonds on the secondary market. This oversupply has caused the yield on these investments to go up. Any new charter school bond offerings must compete with this oversupply and scarcity of investors. The few unrated charter school bond offerings I have seen in the market recently have been at interest rates of around 8.5%. This is about 2% higher than one year ago.

What is the outlook for unrated charter school bond financing? Hopefully, we will see investors start to return to the market in the first quarter of next year, which will cause interest rates to decrease and hopefully return to more normal levels soon. Though I’m not confident interest rates on charter school bonds will return anytime soon to the low levels of recent years, it sure seems that when some confidence returns to the financial markets, investors will be drawn to these attractive tax-exempt interest rates. In the meanwhile, there are some financing options other than publicly offered tax-exempt bonds, which are location and situation-specific. These options have more attractive interest rates and terms. For schools with no financing options other than a public bond offering, it may be advisable to wait for a few months to see what the new year brings…hopefully, it’s not a falling piano above our heads


For information contact Rick Van Alfen, Providence Financial Co., LLC
Phone: 801-556-2290 Email: rick@providencefinancialco.com