CHICAGO — The University of Indiana is planning to enter the market tomorrow and again in early February with $270 million of revenue-backed borrowing that will refund existing debt as well as finance a series of long-standing capital projects as the school launches a new master planning process under a new president.
Many of the projects financed with the new-money piece of the sales will be spread across the university’s eight campuses and some — such as a new life sciences building and a research complex — will dovetail with Indiana’s broader economic plans.
Proceeds from the bond sales will also be used to refinance the balance of the school’s commercial paper sold in 2005 and 2007, as well as some variable-rate demand bonds first issued in 2004. With an enrollment of 73,786 full-time students, Indiana University is one of the largest universities in the country.
“These two deals are financing everything we have on our plate right now. These are all projects that have been in the works for a while,” said MaryFrances McCourt, the university’s treasurer.
The university tomorrow plans to sell $181 million of consolidated revenue bonds that are being issued under a new indenture for the public university. About $58 million of new-money debt would finance construction. Another $123 million will refund the university’s outstanding commercial paper program, variable-rate debt issued in 2004 and facility revenue bonds sold in 2000. The university carries about $140 million of outstanding commercial paper.
The university expects a net present savings of 3.35% from the refunding, which will also serve to move the outstanding bonds under the new indenture. The university eventually expects to refund all existing debt, bringing it under the new indenture. The outstanding variable-rate debt was issued under the university’s facility revenue and student revenue system indentures.
Under the new indenture, the consolidated revenue bonds will be payable from all the university’s available funds as well as the net income of certain facilities, a change the university sought to streamline management of its debt portfolio. Net income from the facilities includes some from housing and parking facilities and certain research and athletic revenues. Student fees —and other revenues that have been pledged for other purposes or the payment of outstanding bonds — are excluded. The university’s available funds balance was at $970 million at June 30, 2007.
Lehman Brothers is the lead underwriter on this week’s transaction.
On Feb. 7 the university plans to issue $87 million of student fee revenue bonds. The series is all new-money debt, McCourt said. About $48 million of that will refund the commercial paper program, while the rest would be issued in new-money debt for capital projects.
JPMorgan is the lead underwriter on the transaction. Ice Miller LLP is acting as bond counsel on both transactions.
While roughly 13% of the university’s existing debt carries insurance, officials decided against purchasing it this time around. “There’s so much bad press and a lot of the insurers are on negative watch,” McCourt said. “We’ve been told by our underwriters that it’s more favorable for us to go to market without it because our underlying strength is so strong.”
Moody’s Investors Services assigns its Aa1 rating to both series while Standard & Poor’s gives its AA to both series. Fitch Ratings does not rate the university.
“The [AA] rating is based on IU’s consistently strong financial performance on a full accrual basis and its good liquidity levels, with 2007 adjusted unrestricted net assets equal to about 45% of expenses and 130% of pro forma debt,” said Standard & Poor’s analyst Susan Carlson in a statement accompanying the ratings report.
After the sales, the university will carry about $815 million of outstanding debt — of which 62%, or $461 million, is reimbursed by the state. While the student fee bonds are built into that figure, the state actually reimburses the school at a higher rate of around 80% of debt service.
The largest single piece of the $181 million consolidated revenue series — $39 million — will finance the construction of an athletic facility at the university’s flagship campus in Bloomington. The project includes the construction of the Hoosier Education and Performance Center, a new Basketball Development Center, and a new Baseball/Softball complex.Proceeds from that series will also fund the completion of the research complex on the Indianapolis campus. The project will join together two research institutes into one campus that will serve the School of Medicine, the second-largest medical school in the country.
“We are putting a lot of strategic focus on life sciences, and it aligns with the state of Indiana and the pharmaceutical industry here,” McCourt said.
The research complex is part of the school’s ongoing partnership with the pharmaceutical giant Eli Lilly & Co., which is headquartered in Indianapolis.
“IU’s research activities, with a significant portion medical-related and conducted at the Indiana University Purdue University Indianapolis campus, are a key strategic focus for the university,” wrote Moody’s analyst Diane F. Viacava in the agency’s rating report.
Viacava cautioned that the university would likely face growing competition for research funding, but noted that the diversity of the university’s funding sources — including the Lilly Foundation — would continue to be a strength for the school. “We expect IU will maintain a strong competitive research position,” Viacava wrote.
Proceeds from the consolidated revenue bonds will also finance two student housing facilities that will provide nearly 800 beds and to renovate the University Place Hotel for the Indianapolis campus, which the school purchased with commercial paper funding last year.
Proceeds from the student fee bonds will be used to finance a variety of projects, including a new science building, heating plant, medical education center at the Fort Wayne campus, as well as a new cyber-infrastructure building that will house data from the school’s supercomputer.
The projects informally mark the end of capital plans under the former administration. Last summer, Michael McRobbie took over as president and the university has since started to draft a new master plan that will include future borrowing, though not likely for the next 12 to 18 months, McCourt said.
“Our plans are so tightly aligned to economic development in the state there will be some adjustments but we’re trying to be prepared for the future,” McCourt said.
