How Charter School Debt Issuers Can Ace Rating Agency Interviews
As the charter school sector continues to grow and mature, municipal bond ratings from Wall Street’s big credit rating agencies including S&P Global Ratings, Moody’s, and Fitch Ratings are increasingly within reach. Charter schools are still unlikely to achieve the high ratings typical of bonds issued by essential public service entities and enterprises such as local governments, public school districts, and water utilities — rating agencies and investors still consider the charter sector largely a “high yield” sector, meaning that most schools are generally non-investment grade credits (1). However, established charter schools and charter management organizations (CMOs) with strong demand, good management, high academic standards, stable financial performance, and at least one charter renewal under their belts are increasingly able to achieve low investment grade (‘BBB’ category) or high speculative grade (‘BB’) ratings. These organizations often find that the credibility of an independent credit rating results in strong investor demand and a lower cost of capital than other financing sources.
While a lower cost of capital is great news, coming face-to-face with credit rating agencies is a stressful and intimidating experience. Here’s the good news: whether you are a new charter school debt issuer dealing with a rating agency for the first time, or you have long-standing established relationships with rating agencies, there are a few simple ways you can maximize your interactions with them, reduce the anxiety of the rating process, and maybe even nab a higher rating. Here are our top 10 suggestions:
10. It’s not all about you. Ratings can feel like an intensely personal reflection on your school and its leadership. The strength of management is an explicit factor in nearly every rating methodology. But there are many rating factors over which you have little to no influence. For example, charter schools face a host of industry risks over which they have little direct control, including legislative and policy risks, local demographics, and funding risk. These risks play a large role in the rating process. Do your best to control the things you can, such as sharing quality information and delivering a strong presentation, and don’t worry about the rest.