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Charter Schools Attract Interest From Bond Investors

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by guest blogger Mike Bock

Bond investors, or financial brokers seeking to buy shares of debt in exchange for a future return, are increasingly looking toward charter schools for revenue opportunities, the Wall Street Journal reported earlier this week.

Charter schools, which cannot rely on income or property taxes for general funding like a traditional school district can, often turn to investors for funding, and those investments are getting larger. Nearly 12 percent of all charter-school bond sales last year came from bond offerings of $30 million or more, compared with 5 percent in 2007, the Journal reported. In addition, average charter school bonds are yielding 3.8 points higher than top-rated general-obligation bonds, which are traditionally issued by local or federal government agencies, since last year.

Experts say charter schools are getting more attention because it's a good time to invest as interest rates are just above zero. But not all charter schools succeed, which could lead to hard times for investors, The Wall Street Journal warns:

"Research advisory firm Municipal Market Advisors calculated earlier this year that 3.91% of charter-school bonds are in default, drawing on emergency support or in violation of bond contracts. In contrast, 0.22% of higher-education bonds, 0.07% of general-obligation bonds and 0.03% of school-district bonds are in trouble.

But as more charter schools open, a smaller percentage of them are being forced to close. Some 6.2% closed during the charter renewal process in the 2010-2011 school year, compared with 12.6% two years earlier, according to the National Association of Charter School Authorizers."

In addition, most charter schools are on 5-year charters, but most bonds have 30-year maturity dates. Since charter schools are relatively new, and there is little precedent for a charter school being around for 30 years, a school that closes and defaults on its bonds could result in significant financial losses for investors.

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