With the municipal debt market reacting violently to the COVID-19 pandemic, high-yield municipal issuers such as charter schools face heightened risk that their access to capital will be constricted and more costly. While all municipal bonds have been hit hard in the last few weeks as investors sold bonds, pushing prices down and yields up, high-yield debt was hit even harder. For charter school borrowers, that means the cost of new borrowing has gone up measurably just since the beginning of March. Furthermore, when investors are in a headlong rush for the exits as they were in mid-March, they don’t always have the time or sufficient information to differentiate more resilient high-yield borrowers from those that are more vulnerable. This can make it harder for the better high-yield credits to access capital at reasonable cost, if they can access capital at all. This risk is particularly acute for charter school debt because it’s a relatively young sector with a lot of small, nonrated borrowers. For charter schools that hope to maintain their access to capital markets, sharing high-quality, differentiating information with the market has never been more critical. Here are a few thoughts on what proactive charter school managers can do to effectively address potential investor concerns.
Focus On the Big Risks. In times of crisis, credit analysts’ focus is significantly narrower than during good times. The analyst that was happy to talk at length about the new music program you are launching to attract more students to your middle school is suddenly no longer interested when they are worried if you will have enough cash to make the next payroll, or whether your charter will be revoked. Now is the time to think about existential risks – things that could impact your ability to operate successfully, if at all, and prepare explanations for investors that describe why your organization’s very existence isn’t at risk.
Academics, the Charter, and Authorizer Relationships. Perhaps the sector’s biggest risk is the continuity of the charter, which almost always has a term much shorter than the debt, commonly five years. While this risk is factored into credit analysts' views systematically and is one of the reasons that it’s predominantly a high-yield sector, charter renewal risk can dominate all other credit factors when the charter is in jeopardy. With most charter schools and traditional public schools now closed due to the COVID-19 pandemic, analysts may be concerned that the charter will be at risk for academic reasons – for example, failure to provide the statutory number of instructional days, failure to demonstrate performance on now-cancelled standardized tests, etc. States and their authorizers may be routinely issuing waivers for this unusual situation and have provided you with assurances that your charter is secure. But investors may not know that unless you tell them, so it’s probably a good idea to make it clear if the charter isn’t at risk and explain why.
Liquidity is King. In a crisis, liquidity is king. Schools with more liquidity have the ability to withstand greater stress, whether it’s from declining enrollment, delays in per pupil payments, or unexpected increases in expenses. Now is a good time to take a hard look at your liquidity, the potential sources of stress on your liquidity, and whether you have enough on hand to weather the storm. If you have access to a bank line of credit, check the terms, the amount of the line, and consider your options to draw on the line or increase the amount of the facility. Other actions to preserve liquidity might include leasing equipment instead of purchasing and reviewing capital budgets carefully for items that can be delayed or reduced. Explaining your level of liquidity and how you are managing it will be viewed favorably by investors.
Revenue and Expense Projections. There are very few organizations nationally that aren’t experiencing some form of revenue and/or expense pressure, and in many cases the pressure is severe. Charter schools may be one of the few sectors that still enjoys a predictable revenue stream. If your revenues have continued uninterrupted, make sure to point that out to investors. But that doesn't mean you're completely unaffected. Have your expenses changed? Are you spending less for maintenance of your now-closed school buildings, but more for online instructional design and student technology? Summarize changes to your revenue and expenses to give a clear picture of whether your income statement is affected or not affected.
Know Your Covenants. In times of crisis, charter school borrowers are more likely to trip various covenants in their debt documents, such as days’ cash on hand and debt service coverage. You can expect investors to ask more questions about covenant compliance now than they would during more a benign environment. Being knowledgeable about your covenants and having the latest calculations at your fingertips will be viewed favorably by investors. To take it one step further, as a proactive management team, review your bond covenants and estimate whether you believe you are at risk of tripping any of them. Although the covenants are only officially calculated at certain measurement dates, and you may be several months from the next measurement date, knowing what your covenants are and how you are doing against them may allow you to take some managerial actions to reduce the risk of tripping them.
Point out the positives! There could be some silver linings for your organization that investors may not notice unless you point them out. For example, do you have a very conservative investment policy, such that your days’ cash on hand has not been affected by the recent swoon in fixed income and equity markets? Point it out! Your school has moved seamlessly to distance learning? Point it out! The pandemic has caused no meaningful impact on revenues and expenses? Charter is stable with authorizer accommodations for academic performance? You get the idea. Investors are shell-shocked with negative news everywhere they turn. They may be assuming that widespread economic and market turmoil is having similar negative impacts on everybody. It’s smart to point out the ways in which your organization has not been affected, because right now, that’s just as important as what has been affected.
By taking a proactive approach to investor relations during the COVID-19 crisis, including making a Voluntary Disclosure of a Material Event on EMMA, charter school borrowers can help investors understand their strengths and challenges better and position themselves for continued access to the capital market for years to come.
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