CHICAGO - Kent State University in Ohio plans to enter the market tomorrow with $225 million of fixed-rate refunding bonds in a transaction that will reduce the school's variable-rate debt by nearly three-fourths and eliminate most of its outstanding swaps and letters of credit.
The issuer plans to hold a retail order period tomorrow and take institutional orders Wednesday.
The refunding comes after a turbulent year in which the university's variable-rate debt suffered from a range of market-related complications including problems that involved its series of swaps in which now-bankrupt Lehman Brothers served as counterparty and bonds that were enhanced with now-downgraded bond insurers.
The school will pay roughly $25 million in fees to terminate swaps and letters of credit associated with the outstanding variable-rate debt. The transaction will reduce the school's variable-rate debt to 23% of its portfolio from 97%.
"Given the experience of the last 12 months, I've been most anxious to remove the risk out of our debt portfolio" by shifting the school's variable-rate debt into a fixed-rate mode, said Gregg Floyd, Kent State's vice president for finance and administration.
"We feel like the university had done a good job of trying to mitigate the risk with swaps," he said. "But the failures in the financial markets revealed unprecedented exposure. The fixed-rate [refundings are] a tremendous opportunity both financially in terms of the attractiveness of the rate itself, but it also eliminates that element of risk from the portfolio."
JPMorgan will lead an underwriting team of seven firms on the transaction. Squire, Sanders & Dempsey LLP is bond counsel. Public Financial Management Inc. is financial adviser.
Moody's Investors Service rates the bonds A1 with a stable outlook. Standard & Poor's rates them A-plus with a stable outlook.
The transaction will refund $157 million of variable-rate bonds issued in April, $41.5 million of variable-rate demand bonds sold last year, and $7.8 million of variable-rate bonds issued in 2000. Proceeds will also cover fees related to terminating a series of swaps with Lehman and letters of credit, including a one-year letter of credit the issuer secured in April from JPMorgan Chase & Co.
The school has not made or received any payments on its swaps since Lehman declared bankruptcy last fall.
After the transaction the school will have $60 million of remaining variable-rate debt, which features a swap with Lehman Brothers as well as a letter of credit from Bank of America.
The refunded bonds mature through 2032, with regular debt payments of $2.6 million through 2028, at which point the payment jumps to $14.6 million and then remains over $12.5 million for the next four years.
The bonds are backed by a pledge of the school's general receipts, which include all its revenue except state aid. Kent State's general receipts totaled $302 million in fiscal 2009.
The school's last large new-money issuance was in 2000, and it expects to issue up to $175 million in the near term to finance renovations and expansions of school buildings, Floyd said. The university is experiencing its largest enrollment jumps ever - a 12.5% increase this year from last year. Total student enrollment this fall will total 37,800 students, who will be spread over the school's eight campuses, including its main campus in Kent, Ohio.
