University of N.C. System Plans $127M for Three Schools

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WASHINGTON - The University of North Carolina System expects to issue $127 million of bonds tomorrow to finance the construction of dormitories, athletic facilities, and other projects as it and other higher-education institutions face state-supported and endowment revenue declines amid the economic recession.

The university system will issue pool revenue bonds in three series for East Carolina University, Appalachian State University, and the University of North Carolina at Charlotte. Each university is rated separately by Moody's Investors Service and each will be responsible for its own debt service and principal payments.

East Carolina is rated Aa3, Appalachian State A1, and UNC Charlotte A3.

Merrill Lynch & Co. is lead underwriter with Jackson Securities, Loop Capital Markets LLC, and Wachovia Securities. Womble Carlyle Sandridge & Rice PLLC is bond counsel with Parker Poe Adams & Bernstein LLP representing the underwriters. First Southwest Co. is financial adviser.

The UNC system and its 16 member institutions face several of the same challenges that the higher-education sector has endured during the recession, now in its 17th month.

The universities expect their appropriations from North Carolina to be cut again in fiscal 2010, after having to absorb a 7% cut as the state scrambled to balance its budget. The state is forecast to cut the system's budget by 9.1% in fiscal 2010.

Each university's individual allocation from the state, and percent of total operating expenses, varies as state grants for research are included in the appropriations.

Declining revenue streams from endowments and the state may require the universities to rely more on debt at a time when their leverage is increasing. East Carolina and Appalachian State expect to sell bonds again in the next 12 months to finance athletic fields and dormitories, according to Moody's. At Appalachian State, pro-forma debt increased twice as much as financial resources in fiscal 2008.

Recent Moody's and Standard & Poor's reports highlight the credit factors affecting higher education. Some states have cut university budgets. Institutions that have relied heavily on their endowments for funding face declining values and illiquid assets. But as in past recessions, the higher-education sector is expected prove its resilience, leaving few if any schools in danger of closing.

"Overall, most universities will be able to weather the storm," said Marc Savaria, the primary author of the report Standard & Poor's issued on June 2. The rating agency has not had to put the entire higher-education sector on a negative outlook, he said.

The credit crisis and recession have presented varying challenges to institutions at different levels on the credit scale. Triple-A and double-A rated schools often have large endowments and have funded operations with a portion of endowment returns - as much as 40% for some schools, Savaria said.

While lower-rated schools rely on tuition for operating revenues, endowment-dependent schools will have less capital to draw on in another three to four years due to losses in 2008 and 2009, Savaria said.

"It's a much smaller amount of money and they've got to find a way to balance their budget with that," he said.

Endowments nationally have lost between 25% to 35% of their values from July 2008 through April, Standard & Poor's estimated. East Carolina and Appalachian State's endowments have each lost about 26%, Moody's said.

Savaria also noted that institutions have increasingly relied on alternative investments such as hedge funds to beat equity market returns. These investments have left university endowments in a liquidity pinch. Private equity and hedge fund investments often require lock-up periods and certain levels of committed capital invested over a specified period, Standard & Poor's report said.

The North Carolina universities have endowment funds invested independently and with the UNC Management Co., which handles system-wide funds. The universities allocated about 20% of investments in hedge funds with the remainder in equities, fixed income, commodities, and cash, Moody's said.

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