(Bloomberg) — Municipal bonds sold by colleges and charter schools became distressed at record levels in 2024, as the amount of defaulted state and local government debt hit a three-year high.
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Last year was the “worst year for municipal defaults since 2021, breaking a three-year streak of sector-wide credit improvement,” wrote Matt Fabian and Lisa Washburn at Municipal Market Analytics in a report published Tuesday. Inclusive of the defaults, borrowers recorded 185 impairments, the most since the coronavirus pandemic roiled credit markets. Impairments can be a missed debt-service payment or an indicator of financial stress, like a broken covenant or the use of emergency means to pay investors.
Of those impairments, 45 were by charter schools — a record sum — followed by debt sold by retirement communities, with 31 such events. Colleges accounted for 24 instances, which is also a record, according to the MMA data. That trend is a “serious concern” for investors, Fabian and Washburn wrote.
A combination of factors drove the troubles for charter schools. Inflationary pressures, a dwindling pool of students due to the declining birth rate and the roll-off Covid-era stimulus dollars weighed on the sector. Higher interest rates made debt restructurings more difficult and inflation increased labor costs.
“The fact that you have expenses rising and revenue decreasing, you’ve kind of got a double whammy,” said Chris Brigati, director of strategic planning at SWBC. Charter schools are often lower-rated credits and stimulus money had bolstered bottom lines for several years which “made them look more stable and positive than they probably would otherwise be.”
To be sure, municipal-bond defaults are still very rare, with 2024’s annual default rate at 0.11%, according to MMA.
And for higher-risk sectors like charter schools, investors can still find opportunities that offer a decent payout, according to Gabriel Diederich, a portfolio manager at Baird Asset Management.
“It’s important to remember that the charter school sector is diverse (variety of sizes, geographies and education models) and can be a great sector for investment,” he said. “Charter schools have become an essential part of our national education system.”
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