Deal In Focus

Fighting Irish Float $150M

CHICAGO - The University of Notre Dame will enter the market as soon as today with $150 million of triple-A rated refunding revenue bonds in a relatively rare debt issuance for the prestigious Indiana Catholic university.

Proceeds from the issue will be used to refinance a chunk of the school's outstanding variable-rate debt into a fixed-rate mode.

With roughly $516 million of outstanding debt, Notre Dame is a careful issuer. It finances many of its capital projects with cash raised through a strong fundraising program that analysts deem one of the school's top credit strengths.

More than half of Notre Dame's outstanding debt is in variable-rate mode, a fairly high percentage for its credit category- though both triple-A rated Northwestern University and Yale University have more than 50% of their debt in floating-rate mode, according to Moody's Investors Service.

The $150 million of educational facilities refunding revenue bonds is divided into two series, one for $80 million and one for $70 million. St. Joseph County - which counts Notre Dame as its largest employer - will act as conduit issuer.

Morgan Stanley is senior manager, with Merrill Lynch & Co. and Wells Fargo Securities also on the underwriting team. Barnes & Thornburg LLP is bond counsel.

Located in Notre Dame, just outside South Bend and about 90 miles from Chicago, the university is considered one of the country's most prominent Catholic higher education institutions. Student demand remains high, with only 27% of applicants accepted, and of those, more than half choose to attend.

The school enjoys considerable philanthropic support from alumni, and was the first Catholic university to raise more than $1 billion. It has already raised more than $1.5 billion as part of its current fundraising campaign, which ends in two years.

"They have been issuing debt gradually," said Moody's analyst Diane Viacava. "Driving their triple-A rating is the fairly low balance-sheet leverage. They're very conscious of the need to balance their use of debt with their balance sheet coverage."

Notre Dame is one of only 17 Aaa-rated private colleges or universities among nearly 300 rated by Moody's. Neither Fitch Ratings nor Standard & Poor's rate the credit.

The school has been able to finance many of its capital projects in the past with cash, eliminating the need for large issuances. A big chunk of the $1.5 billion "Spirit of Notre Dame" campaign will be used to finance various capital projects.

Until 1994, Notre Dame had gone to market only twice in its 152-year history, but it has increased its debt issuance in more recent years.

The upcoming deal follows a $150 million note issue in January. Proceeds from the fixed-rate notes, which carry an interest rate of 4.1% and mature in 2013, were used to support the university's liquidity, according to bond documents.

The school sold $75 million of variable-rate bonds in 2007. Proceeds from the upcoming transaction will be used to refund $43 million of variable-rate debt sold in 1998 and $110 million sold in 2005. The bonds were originally issued to finance various construction projects at the school.

The school is not expected to issue more debt for another few years, Viacava said.

"They have a very good strategic planning process and can look pretty far out in terms of where they want to go," she said. "There's no debt on the horizon."

The upcoming transaction will boost the amount of fixed-rate debt in the university's portfolio. Notre Dame hedges much of the interest rate risk associated with its variable-rate debt with a series of 10 floating-to-fixed-rate swaps.

Up to five of the swaps may be amended or terminated as part of the upcoming bond transaction, according to bond documents.

The tender risk associated with the floating-rate debt is hedged in part with bank support and the school's own strong liquidity.

"In and of itself, the variable-rate debt is not that much of a concern," Viacava said.

Rising tuition revenue has helped boost Notre Dame's balance sheet over the last several years. The annual tuition for an undergraduate in 2009-2010 reached $38,477, or $48,845 with room and board.

Since 2005, tuition and fees have risen 22%, and the total cost of attending Notre Dame has grown by an average annual rate of 5.7% over the last five years, according to the university.

When scholarships and other discounts are taken into account, the average net tuition revenue per student totaled $21,480 for fiscal 2008, according to Moody's - a 37% climb since fiscal 2002.

The rise in tuition is noteworthy considering Notre Dame's policy to admit students regardless of their ability to pay - its "need-blind" admission policy. The policy is coupled with the university's commitment to finance tuition for those students who can't afford it, a practice that began about 10 years ago, according to Moody's.

"They're not the only institution to do it, but there aren't a lot of institutions that do that," Viacava said.

The school is expected to recover from a few recent challenges, including a 20% loss in its investment portfolio amid the recent market collapse. And its swap valuations have improved over the last few years - from a net unrealized loss of $17.6 million as of June 30, 2008, to $1.1 million as of July 31, 2009, with four of the swaps moving into favorable positions for the school.

Unless Notre Dame dramatically shifts its debt strategy or suffers a sudden drop in student demand, it is unlikely to lose its coveted Aaa rating, Moody's said.

"It's a very well-run, high-caliber institution," Viacava said.



Ohio ,

Upcoming Events

Already a subscriber? Log in here
Please note you must now log in with your email address and password.