Regional News

Northeastern, BU Set to Convert ARS

Northeastern University in Boston will be in the market this week with a $360 million revenue bond deal that will include fixed- and variable-rate debt to refinance the school's outstanding auction-rate securities.

Boston University also may be in the market as early as this week with debt sales for similar purposes.

ARS account for $572 million, or 78%, of Northeastern University's total outstanding long-term debt. The remaining bonds carry a fixed rate.

The bonds for Northeastern could price as early as Wednesday.

The university recently has taken on millions of dollars in additional interest costs due to failed auctions.

"Because of recent adverse municipal bond market conditions, which on a year-to-date basis have caused the interest expense on the university's variable-rate debt to exceed budget by approximately $3 million, the university currently plans to convert or refund several series of its auction-rate debt," according to the preliminary official statement.

Lehman Brothers will price the bonds and the Massachusetts Health and Educational Facilities Authority will serve as conduit issuer. Edwards, Angell, Palmer, & Dodge LLP is bond counsel. There is no outside financial adviser.

There will not be a letter of credit or liquidity facility for the $210 million of variable-rate debt included in the transaction, according to MassHEFA spokesman Liam Sullivan.

"They'll be variable-rate put with a one-year reset and so they won't need a letter of credit because their reset is annual," Sullivan said.

Officials anticipate the deal will not be insured.

Moody's Investors Service rates Northeastern A2 with a stable outlook but had not issued a rating report for the new deal as of late last week. Fitch Ratings and Standard & Poor's do not rate the school.

The transaction consists of Series 2008R for $93.74 million, Series 2008S for $56.38 million, and Series 2008T for $210 million. Series R and S will refinance Series 2003N and Series 2005O auction-rate securities to fixed-rate debt. Series T will convert Series 2007P1-3 auction-rate bonds into variable-rate mode.

Current plans call for Series R to feature serial bonds through 2023 with two term bonds maturing in 2028 and 2033, according to the POS. Series S bonds offer one term bond maturing in 2012. The Series T bonds contain three tranches of $70 million, with each tranche maturing in 2037. The exact structure of the deal and maturities are subject to change due to market conditions at the time of sale.

The school has paid interest rates as high as 15% since early February, when investment banks declined to buy unsold auction-rate securities. That leaves investors holding unwanted bonds and issuers paying higher interest rates.

The Series 2003N bonds reset every 35 days and currently carry a rate of 4.9% as of May 1. The ARS' highest rate was 5.5% on Jan. 17. The Series 2005O bonds price weekly and currently carry a rate of 4.43%. Rates on the bonds reached as high as 5.5% on Jan. 24 and Jan. 31. The current rate on the seven-day Series P1 bonds is 5%, as of May 2 and the security's highest rate was 9% on April 25. The Series P2 and P3 seven-day bonds currently carry a rate of 6.49% and 6.48%, as of May 5 and 6, respectively. Both securities hit a 15% interest rate on March 10 for the P2 bonds and March 18 for the P3 bonds.

Lehman the broker dealer for the auction-rate securities and MBIA Insurance Corp. insures both series of debt.

The bonds are hedged with floating-to-fixed rate swaps, with Northeastern paying a fixed rate and a counterparty paying a variable rate. For the Series P1-3 bonds, the university pays 3.756%, according to thes deal's POS. That document does not indicate the counterparty in the swap transaction or if the bank pays a percentage of the London Interbank Offered Rate swap index.

With the Series O bonds, Northeastern pays 3.85%, according to that deal's official statement, which also does not specify the bank involved in the swap agreement or if the derivative is a Libor or SIFMA swap. The school's current financial statement as of June 30, 2007, does not include that information.

The authority also plans to terminate the swap agreements attached to the auction-rate bonds. Northeastern estimates the fair value of the swap connected to the Series 2003N bonds at $745,000, as of June 30, according to the preliminary official statement. The university also estimates the fair value of swaps attached to the Series O and Series P1-3 bonds at $784,000 and $5.46 million, respectively.

Northeastern's goal over the past few years has been to transform from a commuter university to a more traditional college where students live on campus. To achieve this, its debt has increased by more than 75% since the end of fiscal 2002 to the current level of $691 million, mostly to help finance additional residential housing.

Moody's analyst John Goodman said positive operating margins and increased selectivity of applicants along with a solid financial department help offset challenges.

"We certainly incorporated the risks of the swaps into the rating and felt that given their liquidity profile, their operating history, and their management team, that they can certainly handle the debt portfolio that they have at the current rating level," he said.

Northeastern officials declined to comment on the upcoming transaction.

Boston University may also sell bonds as early as this week, including $620.4 million of variable-rate debt, some of which will be taxable. The Massachusetts Development Finance Agency will sell about $500 million of tax-exempt debt on behalf of BU while MassHEFA will sell $134 million of taxable bonds for the university. Lehman will be lead manager for the transactions and Edwards Angell is bond counsel as well. There is no outside financial adviser.

Moody's earlier this month upgraded Boston University to A2 from A3 with a stable outlook, affecting $1.2 billion of outstanding debt. Standard & Poor's rates the school A-minus. Fitch does not rate the credit.

MassDevelopment and Boston University officials said it was too early to discuss the upcoming transaction.

The $485.94 million issue consists of 10 different series of weekly-rate and daily-rate debt, each enhanced by a letter of credit, according to the preliminary official statement. The bond proceeds will help refinance previous floating-rate debt and convert ARS into variable-rate mode. The deal will also help finance the construction of a new dormitory, building acquisitions, and renovations to the heating and cooling system throughout campus, along with other capital projects.

Officials believe the market can take on the large amount of Massachusetts paper in one week, with one source close to the deals saying there should be no problem with the market absorbing the bonds.

Along with the sizeable higher education debt transactions, MassHEFA may potentially sell this week more than $500 million of fixed-rate revenue bonds on behalf of CareGroup Inc. to help refund existing debt and support infrastructure upgrades at the system's four hospitals.



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