August 11, 2010 In a potentially groundbreaking financing deal that closed earlier this month, Birmingham Community Charter High School in Los Angeles received $3 million for working capital through a Revenue Anticipation Note (RAN) offering. This deal, assisted by CCSA, provided badly needed working capital to address Birmingham's state deferral-caused cash flow challenges. This was the first-ever RAN financing using a state-intercept mechanism to close in California for charter school working capital, and this structure has the potential to assist more charter schools moving forward.
As all charters are aware, California's budget problems are creating an increasingly unsustainable cash flow situation for public schools like Birmingham, who are forced to cope with several payment deferrals and ultimately a shift of 25% of state aid general purpose funding from one fiscal year to the next. While districts can reliably access Tax and Revenue Anticipation Notes (TRANs) to address most of their cash flow concerns, charter schools have far fewer options.
RANs are essentially short-term note obligations that are similar to TRANs. RANs are sized based on the school's future apportionments over a given time period and the notes are sold to investors. The purchase proceeds are used as capital to lend to charter schools. While this process seems straightforward, CCSA had to work with several organizations under a tight timeline to close the deal.
"This intimate, motivated working group was absolutely critical to closing this deal. It was a group that persevered through multiple challenges that threatened to derail the RAN issuance," said Joe Harrington, CCSA's Director of Financial Services.
Birmingham was supported by Marshall Mayotte, who manages the financials for the school on behalf of ExED, a non-profit provider of charter school business management services. "This effort is the first time the state intercept has been used to capture repayments for a working capital program," noted Mayotte. "I hope this will help other schools commit in future programs."
The California School Finance Authority, which served as the conduit issuer of the RAN, was created in 1985 to provide financing for working capital and capital improvements for public schools. CSFA utilized the State Controller's Intercept Mechanism to provide security for the investor; set aside payments for principal and interest will be made directly from the state to the NCB Capital Impact.
Another partner, First Southwest, played a critical role as financial advisor for the financing. According to First Southwest Senior Vice President Mike Kremer, "while this is a great win for charter schools, it is only the start. We look forward to a day when a RAN structure or something similar can sustainably provide cost-effective financing to a pool of charter schools."
The deal was also supported by Orrick Herrington & Sutcliff, a legal firm with a 100-year firm history in public finance that includes the financing of such iconic projects as the Golden Gate Bridge and Carnegie Hall. Orrick served as the bond counsel on the deal.
CCSA also worked closely with the deal's underwriter and investor, NCB Capital Impact. NCBCI is a national, non-profit community development organization that provides financial services and technical assistance. NCBCI has underwritten and invested in CCSA's Growth Loan program and has been instrumental in CCSA efforts to foster the development of accessible, high-quality educational facilities through low-cost loans to charter schools. NCBCI's flexibility and vested interest in assisting Birmingham's working capital situation was crucial for success. "We're pleased that we can be part of this initial transaction, which we hope will lead to improved access to critical working capital for California's charter schools,'' said Scott Sporte, Managing Director of the Community Investment Group at NCB Capital Impact.
CCSA will continue to partner with this working group and with other potential investors to capitalize on the positive repercussions of Birmingham's successful RAN, and to work with other charters in the future to lower annualized costs through increased efficiencies and economies of scale.