CHICAGO - The University of Michigan will sell $224.5 million of variable-rate general revenue bonds the week of March 5 as part of its 10-year, $6 billion capital campaign that includes construction of a new hospital and business school.
The sale - the university's largest issue in the last 15 years - will be followed by $1 billion of additional borrowing over the next 10 years to finance remaining pieces of the capital plan, said assistant treasurer Milagros Dougan.
The upcoming issue will be sold in two series, one that will reset weekly and one daily. The university plans to enter into a floating-to-fixed rate swap for $80 million to $100 million of the issue, according to Dougan. With the new deal, the university will have a total of five outstanding swaps.
UBS Securities LLC is acting as sole underwriter on the transaction, while Miller, Canfield, Paddock and Stone, PLC is the university's bond counsel.
"We always look at the alternative of issuing fixed-rate bonds, but the economics make this structure - variable rate with a swap - more attractive," Dougan said.
Floating-rate debt makes up roughly 65% of the school's total $1.2 billion debt portfolio. It carries no auction-rate debt.
The bonds are backed by a pledge of the university's general revenues, which includes all receipts from tuition fees, auxiliary revenues, and investment income. Hospital revenue - the university's other major revenue stream - will not be pledged for this issue.
Moody's Investors Service has assigned its Aaa/VMIG1 rating to the upcoming sale, noting the university's strong market position across its academic, research, and clinical services and its robust financial performance.
The University of Michigan's total financial resources have grown 34% - to $8.6 billion - over the last two years, boosted by an aggressive, $2.5 billion fundraising campaign and investment portfolio returns of more than 25% in fiscal 2007.
The university receives only 7% of its operating revenues from the state, so its own financial performance has been largely spared from Michigan's faltering economy.
Moody's also praised the mix of funding that will finance the school's large capital plan.
"The university has consistently used a mix of gifts, operating cash flow and debt to finance its capital projects, keeping leverage levels modest," wrote analyst Roger Goodman in a report on the upcoming sale. He estimates that, under the capital plan, debt service will peak at $1.6 billion in 2014, "which should be easily absorbable at the current rating level."
Standard & Poor's assigns a AAA rating to the university's outstanding general revenue debt.
Proceeds from the sale will be used toward a series of campus improvements, including renovations of the Michigan Stadium and continued construction of the new Stephen M. Ross School of Business. Work continues on the $500 million Children's and Women's Replacement Hospital - a key part of the capital campaign, which includes building a new dormitory and renovating existing facilities.
The school enrolls about 56,000 undergraduate and graduate students. The university has not yet decided how often it will enter the market over the next few years, said Dougan.
"It's a plan, so it will change. It will be decided over the 10-year period," she said.
