skip navigation
Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

MARKETS
August 30, 2022

Weekly Municipal Monitor—Back to School with Charter Opportunities

By Thea Okin, Daniel Zheng

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Municipals Posted Negative Returns

Municipals posted negative returns last week and underperformed Treasuries in most maturities. Munis followed Treasury rates higher and underperformed in long maturities amid hawkish Federal Reserve comments. Meanwhile, high-grade municipal yields moved 6 to 12 bps higher across the curve and market technicals remained weak as fund outflows continued. The Bloomberg Municipal Index returned -0.47% while the HY Muni Index returned -0.55%. This week, as schools begin to open, we highlight growing opportunities in the charter school sector.

Technicals Remained Weak as Fund Outflows Continued

Fund Flows: During the week ending August 24, weekly reporting municipal mutual funds recorded $1.2 billion of net outflows, according to Lipper. Long-term funds recorded $1.0 billion of outflows, high-yield funds recorded $167 million of outflows and intermediate funds recorded $39 million of inflows. The week’s outflows extend year-to-date (YTD) outflows to $81.2 billion.

Supply: The muni market recorded $7 billion of new-issue volume, down 39% from the prior week. Total YTD issuance of $263 billion is 9% lower than last year’s levels, with tax-exempt issuance trending 1% higher year-over-year (YoY) and taxable issuance trending 42% lower YoY. This week’s new-issue calendar is expected to remain steady at $7 billion ahead of the holiday weekend. Large deals include $1.8 billion Chicago O’Hare Airport and $600 million Chandler Industrial Development Authority (Intel, Inc.) transactions.

This Week in Munis: Back to School with Charter Opportunities

Charter schools are embedded in the US public educational system with more than 7,500 charter schools serving 3.4 million students. Charter schools offer education alternatives for families that seek performance or philosophical differences from the traditional K-12 institution. Unlike traditional public school districts, charter schools have no taxing power and are typically funded by states, based on a formula that tracks enrollment. Overall charter school enrollment comprises just 7% of the 47 million students in public schools, but has more than tripled since 2005, a period during which traditional K-12 enrollment had remained unchanged, according to the National Alliance for Charter Schools.

Exhibit 1: Charter School Enrollment
Explore Charter School Enrollment
Source: National Alliance for Charter Schools 2021 Data Digest, Census. As of Fiscal-Year 2020. Select the image to expand the view.

Rising enrollment trends have expanded the need for charter facilities, which has contributed to a significant increase in charter school issuance over the past decade. Charter school issuance has increased from $365 million in 2005 (0.1% of total issuance) to nearly $6 billion in 2021 (1.2% of total muni issuance).

Exhibit 2: Charter School Issuance by Year
Explore Charter School Issuance by Year
Source: Bloomberg. As of 26 Aug 22. Select image to expand the view.

Charter schools are subject to renewal by an authorizing entity, typically a local district, higher education institution or state authority. Considering this renewal risk along with the lack of taxing power, municipal investors and rating agencies have tread carefully on charter schools, focusing on the ability to achieve enrollment growth, maintain competitive academic performance and sustain finances. The sector generally maintains lower public credit ratings and trades at higher spreads versus traditional K-12 public issuance.

Despite these concerns, overall credit within the sector has remained resilient. Of the over 1,200 obligors in the sector, just 19 charter schools defaulted since 2005. Even through the pandemic conditions, charter schools quickly adapted to remote learning and in many cases experienced an improved fiscal position due to the Elementary and Secondary School Emergency Relief funds and Paycheck Protection Program loan forgiveness. All told, the sector has recorded more public agency upgrades versus downgrades this year.

Western Asset remains constructive on the growing charter school sector which we believe will continue to offer relative value opportunities. However, diligent credit analysis is required at the individual obligor level. We favor charter schools that maintain high enrollment levels, particularly those with strong waitlists and retention levels. We also look to strong academic results that potentially can attract philanthropy while providing a framework for growing demand, ensuring that the charter schools remain important to their communities. Lastly, a management assessment is crucial given that we have observed several cases of fraud that have threatened the sustainability of select issuers in recent years.

Exhibit 3: Municipal Bond Yields and Index Returns
Explore Municipal Bond Yields and Index Returns
Source: Bloomberg. As of 26 Aug 22. Select the image to expand the view.
Exhibit 4: Tax-Exempt and Taxable Muni Valuations
Explore Tax-Exempt and Taxable Muni Valuations
Source: Bloomberg. As of 26 Aug 22. Select the image to expand the view.
© Western Asset Management Company, LLC 2022. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.
Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank. Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan. Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.