DALLAS -Baylor University in Texas will issue $274 million of refunding bonds over the next two weeks to restructure debt tied up in auction-rate and variable-rate bonds insured by XL Capital Assurance.
In a negotiated deal led by Lehman Brothers next week, the private Baptist university will issue $115 million of fixed-rate revenue refunding bonds, Series 2008C, through the Waco Education Finance Corp.
The upcoming issue is the first in which the Baylor name will appear with a credit rating. The university had to obtain recent ratings of AA-minus from Standard & Poor's and Fitch Ratings to issue the new debt. All of the debt to be refunded was insured by XL Capital.
"We did not have a public rating," said Reagan Ramsower, chief financial officer at the Waco-based university. "The market could not look through the XL Capital designation to the university, so we did not have sufficient visibility."
The week of April 7, Baylor will issue $159 million of Series 2008A and B variable-rate bonds.
With the collapse of the auction-rate markets and downgrades in XL Capital's credit ratings, Baylor will use the new debt to replace $266 million of variable-rate debt, including $221 million of Series 2002A and 2006 weekly variable-rate demand bonds.
The refunding will also refund $45.6 million of Series 2002B select auction variable-rate securities, or SAVRS. Baylor will use internal reserves or short-term borrowing to take out another $10.6 million of Series 2002C taxable SAVRS.
The new variable-rate debt will carry a standby bond purchase agreement to be provided by JPMorgan Chase & Co. that replaces the insurance.
Earlier this year, XL Capital Assurance's ratings were lowered to A3 from Aaa by Moody's Investors Service, and to A-minus by Standard & Poor's. Fitch yesterday slashed its rating for XL Capital to BB from A.
Ramsower said there was no way to rid the bonds of the insurer's name without refinancing.
"You would think you could get insurance off the issue some other way, but you can't," he said. "Our bond counsel, Vinson & Elkins, looked at all the possibilities."
Baylor began working with financial adviser Prager, Sealy & Co. of New York after the downgrades of XL Capital.
"We knew we were going to have a problem by mid-to-late January," Ramsower said. Rates on the auction-rate debt had risen to the range of 8% to 11% by the end of February, he said.
With the respected Baylor name associated with the bonds, Ramsower said he expects a good reception in the market.
"I think the Baylor name has gained nationwide recognition for quality," he said.
The university is one of numerous issuers refinancing auction-rate securities to avoid onerous reset rates.
Dallas-Fort Worth International Airport yesterday refinanced $337 million of revenue bonds to convert auction-rate debt to fixed rate.
Earlier this month, the Oklahoma Turnpike Authority replaced insurance from XL Capital on $530.8 million of variable-rate refunding bonds issued in 2006 with a one-year standby bond purchase agreement provided by a group of three banks.
Baylor was chartered by the Republic of Texas on Feb. 1, 1845, and is the oldest continuously operating college in the state. It is the largest Baptist university in the world and includes law and other doctoral programs. The university's financing is separate from the Baylor medical and dental schools in Dallas and Houston.
