HIGHLIGHTS: CONTACT US: MARKET UPDATE: February 2018

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1 February 2018 HIGHLIGHTS: 2017 ended with a rush of charter schools/cmos issuing bonds ahead of proposed tax reforms. saw an all-time monthly record of $62.5 billion of municipal bonds issued. We will review what ended up in the ultimate Tax Reform bill and what it means for charter schools in MARKET UPDATE below. Baird s National Charter School Finance Group completed 16 financings totaling approximately $720 million in borrowings in 2017 (more than any other firm in the nation). Three of these financings are highlighted in DEAL SPOTLIGHT below. CONTACT US: ROBERT W. BAIRD & CO. Brian Colon, Manager bcolon@rwbaird.com (303) Jim Blandford, Managing Director jblandford@rwbaird.com (303) National Charter School Finance Group CharterSchoolFinance@rwbaird.com Connect with us on LinkedIn! MARKET UPDATE: Since the introduction of H.R.1 (informally known as the Tax Cuts and Jobs Act (the Act ) on November 2nd, the municipal bond market experienced tremendous volatility as demonstrated by interest rate fluctuations over 2 months in Figure 1. Soon after the House GOP released its version of the Act, short-term municipal rates ( MMD ) climbed to highs for the year while long-term rates declined. The final impact of the tax reform legislation is yet to be seen; however, with the Federal Reserve Board also raising the Fed target rate, short-term interest rates increased up to 44 bps over the time period while longterm rates declined. Short-term interest rate s rapid increase compared to long-term interest rate s decline has resulted in the flattest yield curve in over 10 years. Fortunately, most bond issues are amortized over years and the drop in long term rates more than outweighs the rise in short term rates. Figure 1: Interest Rate Volatility Key Events Date AAA MMD (%) 2 YR 5 YR 10 YR 15 YR 20 YR 30 YR House Republicans Introduces TRB 2-Nov Nov TRB introduced in the Senate 9-Nov House passes TRB 16-Nov Senate Budget Committee Sends TRB to Senate Floor 28-Nov Nov Nov Senate passes TRB with Provisions (Sat., 12/2) 1-Dec Dec Dec Fed Raises Interest Rates 13-Dec Senate passes Committee approved TRB 20-Dec President signs TRB into Law 22-Dec Current 9-Jan MMD (%) Municipal Interest Rate Comparison (AAA MMD) Nov 9-Nov 16-Nov 23-Nov 30-Nov 7-Dec 14-Dec 21-Dec 28-Dec 4-Jan 2 YR 5 YR 10 YR 20 YR Source: Thomson Municipal Market Data as of January 9, 2018

2 Despite this volatility, tax-exempt borrowers rushed to market in anticipation of losing the tax-exemption for advance refundings (and Private Activity Bonds when the Tax Reform Bill was first released) and ended December with the largest issuance month in history at $62.5 billion. Of this amount, 24 bond issues totaling over $787 million were issued for charter schools. Figure 2: Issuance Volume for November Largest Municipal Issuance in Nov-Dec History Going forward, we have summarized the key changes of the Act that will impact the municipal market, and to some degree (because many charter schools borrow in the tax-exempt bond market), charter school borrowers. The following graphic provides five main and significant changes and how and why it impacts our clients. Source: The Bond Buyer Figure 3: Key Changes that Impact the Municipal Market Eliminates the Tax-Exemption for Advance Refunding Bonds Eliminates Qualified Tax Credit Bonds Qualified School Construction Bonds (QSCBs), Qualified Zone Academy Bonds (QZABs), Qualified Energy Conservation Bonds (QECBs) and New Clean and Renewable Energy Bonds (NCREBs) Bonds. Reduction of Corporate and Individual Tax Rates Corporate: Reduced from a maximum rate of 35% to a flat rate of 21%. Individual: Top tax bracket reduced from a 39.6% to 37% and seven individual tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37% Individual Deductions State and local tax deduction capped at $10,000 Mortgage interest deduction reduced from $1 million to $750,000 Alternative Minimum Tax (AMT) Corporations: Repealed in its entirety Individuals: Temporary increased exemptions Sources: Baird and What Does U.S. Tax Reform Mean For The Muni Market? ( Limits flexibility of issuers to generate sa vings, restructure debt, and/or eliminate unfa vorable terms on outstanding bonds. Charter schools will no longer be able to refinance their bonds in advance of the call date on a tax-exempt basis. A taxable option that allowed issuer to access lower interest costs due to holder receiving tax credit or issuer receiving subsidy payment. Holders and iss uers of bonds issued pre-2018 will still receive these benefits. Some charter schools in their early development cycle were beneficiaries of QSCBs and Q ZABs. This financing option is no longer available f or charter schools. Lower corporate tax rates may als o decrease the value of the taxexemption on bonds to certain institutions such as banks. Capping deductions may have a negative impact from a credit perspective for state and local governments as they may face challenges in raising capital (taxes) for projects and house sales (tax base) may decline. Ma y further limit any potential investment interest from retail bond buyers. This provision will likely have a very limited or no impact for charter school bonds. Historically, AMT was applied to certain Private Activity Bonds ( PABs which was preserved) and resulted in higher interest rates for those issuers. After the AMT modifications, bonds subject to AMT may ha ve more favorable interest rates. However, since it is in the ory supposed to lower tax burdens, it may also de crease the value of the tax-exemption in municipal bonds. Many charter s chools that borrow as Not-for-Profit entities borrow under PAB bond issue rules. The ultimate result may be a higher borrowing rate for charter schools. CHARTER SCHOOL BOND ISSUANCE ROUNDUP: Issuance Volume by State: 2017 was a busy year for charter school bond market participants. Based upon information derived from market sources, there were ±140 publicly offered charter school bonds issued in 24 states, totaling over $3.5 billion in par amount. Arizona issued the most bonds in 2017 (over $882 million), beating out Texas (over $531 million). Baird underwrote the second largest charter school financing ever completed ($176.6 million Education Revenue and Refunding Bonds, Series 2017) to date for IDEA Public Schools in August of See DEAL SPOTLIGHT on the following pages for more information. 2

3 DEAL SPOTLIGHT: IDEA PUBLIC SCHOOLS (TEXAS), TAPESTRY CHARTER SCHOOL (NEW YORK), and GREATHEARTS ARIZONA: IDEA Public Schools ( IDEA ) is a long-term client of Baird s charter school team, having worked with our team members since 2007 in completing 11 bond financings totaling over $700 million. The latest successful transaction completed by Baird for IDEA was, at the time of issuance, the largest charter school financing completed to date. The $176.6 million financing was issued to finance improvements at IDEA s existing educational facilities, to acquire land for future schools and other school expansions and to advance refund some of IDEA s bonds issued in 2009 and The refinancing provided over $13 million of total interest cost savings to IDEA, enabling more dollars to be spent in the classroom rather than paying interest cost. IDEA secured an overall 30-year borrowing rate of 3.51%. (continued on the following page) 3

4 Tapestry Charter School ( Tapestry ) is a K-12 charter school located in Buffalo, New York and is a client that Baird worked with over 2 years prior to selling $33.9 million bonds in July of Bond proceeds were used to refinance loans and to finance the cost to acquire and make improvements to Tapestry s educational facilities. Baird led the development and strategy for acquiring a first-time rating for Tapestry, and ultimately secured a BB+ credit rating. Obtaining the highest possible rating is critical to a charter school s ability to borrow at the lowest possible borrowing rate. The interest rates achieved for this financing ranged from 3.875% to 4.70%. GreatHearts Arizona ( GHAZ ) is a premier charter school network currently operating 22 schools, serving over 10,000 students in grades K-12 throughout the Phoenix Metropolitan area. Baird has been part of the GHAZ financing team since 2014, and is proud to have assisted with multiple financing transactions in support of the organizations continued growth and success. The 2017A&B Bonds were a strategic part of the overall GreatHearts AZ finance plan to refund its Series 2012 bonds for savings and fund the acquisition and construction of new facilities for its Maryvale Prep students, allowing for additional schools to be added to the obligated group of schools under a parity pledge of revenues for all of the GHAZ long-term debt, further strengthening its financial positon. The 2017A&B Bonds were one of the first issues to be qualified under the newly instituted Arizona Public School Credit Enhancement Program, providing for the Bonds to be rated AA- by S&P ( BBB- Underlying). The issue was extremely well received by investors, achieving an all-in borrowing cost of 3.86%, with the Net Present Value Savings on the refunding reaching over $1.7 million (11.4% of the refunded bonds). 4

5 In August, an unexpected opportunity was presented to GHAZ to purchase an existing facility adjacent to the current Scottsdale Prep campus. This rare opportunity presented a number of challenges, including a compressed timeframe in order to meet certain deadlines. The GreatHearts administration and the finance team was up to the challenge and the 2017C&D Bonds were qualified under the enhancement program, receiving the AA- rating ( BBB- Underlying) from S&P. The financing allowed GHAZ to purchase the adjacent parcel of land, renovate an existing structure to accommodate 1,000 K-5 Archway Scottsdale students, and fund future improvements to the land to include constructing a gym/multipurpose facility and develop a competitive athletic field for the Scottsdale Prep students, with a very favorable long-term all-in borrowing cost of 3.785%. ABOUT BAIRD: Baird s National Charter School Finance Group is the #1 ranked underwriter of charter school bonds since 2009 (Source: Thomson Financial, January 2009 ). Since 2003, members of the Baird Charter School Finance Group have completed over 165 charter school financings totaling over $3.5 billion nationally. We have been in the forefront of providing innovative financing structures to charter schools utilizing tax-exempt bonds, New Markets Tax Credits, interim loans, and a combination of methods to finance construction, land purchase, renovations and other capital projects. We work with charter schools of all kinds, ranging from large and growing networks/cmo s to single, stand-alone charters that are relatively early in their development cycles. 5

6 Baird s National Charter School Finance Group has the knowledge and expertise to effectively address the challenges that are unique to charter schools during different cycles of their development and implement structures that provide maximum flexibility for future borrowings. A sample of some of Baird s 2017 charter school financings follows: Massachusetts Development Finance Agency (Foxborough Regional Charter School) $25,735,000 Rev enue Bonds Series 2017B District of Columbia (KIPP DC) $128,530,000 Refunding Rev enue Bonds Series 2017B The Industrial Development Authority of the County of La Paz (Arizona) (Imagine Schools Desert West ) $10,210,000 Education Facility Revenue Bonds Tax able Series 2017B Arlington Higher Education Finance Corporation (Texas) (UME Preparatory Academy) $22,490,000 Tax able Series 2017B S&P: BBB- S&P: BBB+ Non-Rated Non-Rated Arizona Industrial Development Authority (Arizona Agribusiness & Equine Center) Public Finance Authority (Nevada) (American Preparatory Academy Las Vegas) Philadelphia Authority for Industrial Development (Pennsylvania) (Southwest Leadership Academy) The Industrial Development Authority of the County of Maricopa (Arizona) (GreatHearts Arizona) $23,995,000 Series 2017A (Credit Enhanced) and Series 2017B $29,965,000 Charter School Revenue Bonds Tax able Series 2017B $10,260,000 Charter School Revenue Bonds Series 2017B (Taxable) $19,500,000 Series 2017C and Tax able Series 2017D S&P: AA- (Arizona CEB Program)/BB+ S&P: BB Non-Rated S&P: AA- (Arizona CEB Program)/BBB- Director of the State of Nevada Depart. Of Business & Industry (Nevada) (Doral Academy of Nevada) $25,270,000 Charter School Revenue Bonds Series 2017B (Tax able) Arlington Higher Education Finance Corporation (Texas) (Uplift Education) $25,380,000 Series 2017B Clifton Higher Education Finance Corporation (Texas) (IDEA Public Schools) $176,585,000 Education Rev enue and Refunding Bonds, Series 2017 California School Finance Authority (KIPP LA Schools) $40,750,000 School Facility Revenue Bonds, Series 2017A S&P: BB+ S&P: AAA (PSF) / BBB- S&P: AAA (PSF) / BBB+ S&P: BBB SOURCES: Thomson Municipal Market Data Interactive; The Bond Buyer; Investment Company Institute Website; U.S. Department of Treasury; Bureau of Labor Statistics. IMPORTANT DISCLOSURES Baird may from time to time have a proprietary position in the debt obligations of the issuers mentioned in the report. This report is for information purposes only and in no event should it be construed as a solicitation or offer to purchase or sell a security. The information presented herein is taken from sources believed to be reliable, but we do not guarantee the accuracy or completeness. Any issue named or rates mentioned are used for illustrative purposes only and may not represent specific features or securities available at a given time. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, securities prices, market indexes, operational or financial conditions of the issuers, or other factors. Past performance is not a guarantee on future performance. Preliminary Official Statements, Final Official Statements, or Prospectuses for new issues if mentioned herein are available upon request. For more information regarding municipal securities, visit emma.msrb.org. This report does not provide recipients with information or advice that is sufficient on which to base an investment decision. This report does not take into account the specific investment objectives, financial situation, or need of any particular client and may not be suitable for all types of investors. Recipients should consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report. For investment advice specific to your situation, or for additional information, please contact your Robert W. Baird Financial Advisor and/or your tax or legal advisor. Copyright 2018 Robert W. Baird & Co. Incorporated. If you no longer wish to receive s from Baird, reply to this with "REMOVE ME" in the subject line. 6