Morgan Stanley
  • Sales and Trading
  • Mar 2, 2022

New Social Bonds Help Build NYC Charter Schools

KIPP NYC raised money through social bonds—an asset growing in popularity—to create more space to educate low-income students of color.

In New York City, securing a quality education for children can be a competitive task. For families across the socio-economic strata, admission to free charter schools such as KIPP NYC is highly coveted as its students beat national rates for high school graduation, college matriculation and college graduation and outperform the city and state on New York State exams for grades 3-8.

KIPP NYC Public Charter Schools—part of KIPP’s nationwide network of charter schools, which is the biggest in the country—supports an underserved community: 90% of its students qualify for free or reduced-price lunch, 99% are students of color and the schools report a 94% student retention rate. Applications to its 18 schools in the Bronx, Brooklyn, Harlem and Washington Heights far outpace the number of available seats, so students are selected randomly through a blind lottery. During the 2020-2021 school year, KIPP NYC’s waitlist exceeded 6,100 students. Nearly half of KIPP NYC’s students are college graduates, many in careers such as law, finance, technology, medicine, entrepreneurship and education.

The projects funded by bond proceeds advance KIPP NYC’s mission to enhance economic mobility of historically underserved communities.
Alicia Johnson KIPP NYC President

One obvious solution to help reduce the supply-demand gap is to create more schools, which is what KIPP NYC is currently working to achieve. To build two new K-8 school facilities and fund the renovation of a temporary swing space that will eventually house a high school in the Bronx, last year the charter school system decided to tap the public bond market and for the first time issued $238 million in municipal social bonds, which Morgan Stanley underwrote. “The projects funded by bond proceeds advance KIPP NYC’s mission to enhance economic mobility of historically underserved communities through improving access to quality, equitable education in the Bronx,” says KIPP NYC President Alicia Johnson.

The bonds were sold within the first 20 minutes of the public offering, a testament to growing investor appetite for assets targeting social impact amid the COVID-19 pandemic. “Post-COVID, we’ve seen explosive growth in the social part of ESG,” which refers to Environmental, Social and Governance initiatives and investments, says Grace Chionuma, a Managing Director in the Fixed Income Group at Morgan Stanley, who led the underwriting of KIPP NYC’s social impact bonds. “There’s an energy and focus that came out of the health pandemic and economic crisis, and all that they revealed around societal inequities.”

Rise of Social Impact Bonds and Sustainable Investing

During the pandemic, the majority of growth in the green, social and sustainability bond market—which more than doubled in 2020 from 2019—came from an increase in social and sustainability bonds,1 as investors prioritized financing for social inequities exacerbated by COVID-19, such as decreased nonprofit fundingfalling health-care system revenues and unequal access to resources and opportunities. “Demand is high—there are too many dollars chasing too few sustainable bonds,” says Elizabeth Harris, a Vice President in the Fixed Income Division at Morgan Stanley who helped underwrite KIPP NYC’s social impact bonds.

Indeed, a strong majority of individual investors—79%—expressed interest in sustainable investing last year, a report from the Morgan Stanley Institute for Sustainable Investing shows, while Millennial investor interest rose by four percentage points to an all-time high of 99%. Chionuma says “a shift in generational wealth” is helping boost interest in impact investing, and thus, sustainable bonds. “With wealth in new hands, there’s a heightened interest in environmental and social impact,” she says.

Roadmap for KIPP NYC’s New Schools

Money raised from KIPP NYC’s social impact bonds will be used to finance or refinance the costs of acquisition, construction, furnishing and improvement of the new Bronx schools. Many of KIPP NYC’s schools are located within existing New York City public schools. The three new sites, however, will not be co-located; they will be private facilities owned and managed by KIPP NYC for the benefit of KIPP NYC students in the Bronx.

Ahead of last year’s social impact bonds offering, in 2020 Morgan Stanley’s Public Finance and Capital Solutions teams made a direct loan of $58 million to help KIPP NYC jumpstart building the new schools, to meet deadlines for construction and the start of the 2023 school year. The temporary space opened in August 2021, and the two K-8 facilities are set to open in August 2023.

“From a child’s perspective, they’ll be walking into custom-built, brand-new spaces that are designed to support and fulfill their educational instruction,” Chionuma says. “We want this positive social outcome to help drive equity and economic inclusion for the people in these neighborhoods.”