DALLAS — The growing Texas Tech University System seized its first opportunity to price $174 million of revenue bonds yesterday as market conditions continued to favor strong credits.
With ratings in the double-A category, the serial bonds with final maturity in 20 years earned a yield of 5.41%, representing a spread of 42 basis points over Municipal Market Data’s triple-A composite.
Jim Brunjes, vice chancellor and chief financial officer for the Texas Tech system, said the total interest cost came in 17 basis points below the previous low for university debt. On the $53 million refunding portion, TTUS saved about 10%, he said.
“We were very pleased and very surprised,” Brunjes said. “It’s a funny market in that rates are low, but you still have to find someone to buy the bonds. What good are low rates if no one buys the bonds?”
Standard & Poor’s and Fitch Ratings conferred their AA ratings on the bonds, while Moody’s Investors Service affirmed its Aa3. The outlooks are stable.
With the double-A-rated state of Texas providing 29% of revenues, the university system enjoys broad financial backing, including fees from 37,000 students, analysts note. The Tech bonds priced 22 basis points above Texas general obligation debt on the long end.
The deal was negotiated through senior managers RBC Capital Markets and JPMorgan, with Citi, Estrada Hinojosa & Co., Frost Bank, and Morgan Keegan & Co. as co-managers.
First Southwest Co. serves as financial adviser, with Fulbright & Jaworski as bond counsel.
Matthew Boles, managing director at RBC, called the deal “a spectacular pricing.” The bonds were oversubscribed by two times on some maturities and up to six times on others. Based on market conditions Friday, the syndicate decided to jump in at the opening of the market yesterday.
“We’ve seen a number of institutional investors return to the market,” Boles said. “There is still a lot of volatility in this market, so you have to be nimble and quick.”
Among TTUS’ strengths, Standard & Poor’s counts “a manageable debt service burden of less than 5% of adjusted operating expenses and a history of stable, balanced financial operations and good fund balances.”
With this issue the Texas Tech system’s total debt load will come to $598 million. Debt service this year will come to about $45 million.
Tech also shares the Higher Education Assistance Fund that supports state universities that do not receive funds from the Permanent University Fund. The PUF backs debt and provides annual distributions to the University of Texas and Texas A&M University systems.
Since 1997, TTUS has received a flat annual payment of about $29.8 million from the HEAF. For the 2008-2009 biennium, the annual HEAF appropriation increased by about 50%, to $44.7 million per year.
Created by the state Legislature in 1923 as a regional technological and liberal arts college, Texas Tech has 65 academic departments with graduate and undergraduate degrees. The system includes Texas Tech University in Lubbock, Texas Tech University Health Sciences Center serving West Texas, and Angelo State University in San Angelo.
The university is headed by chancellor Kent Hance, a former congressman known in the region for his defeat of challenger George W. Bush in 1978. Hance’s depiction of Bush as an outsider and Ivy Leaguer reportedly led Bush to develop a more homespun image that later catapulted him into the governor’s mansion and the White House. A former Tech student with a law degree from the University of Texas, Hance was credited as a state legislator with winning funding for the Tech medical school.
In 1979 lawmakers designated the medical school the University Health Sciences Center. The center provides health care for West Texas, serving 48% of the state geographically with a population of just 2.4 million.
Some of the new debt will be used for development of the El Paso campus into a four-year medical school, where doctors and nurses will practice in the public Thomason Hospital. The first class of the new medical school will be seated in August.
The development of the medical school coincides with construction of the first public children’s hospital associated with Thomason. Last year, El Paso County issued $120 million of general obligation bonds for the new hospital after winning voter approval in 2007.
The Texas Tech health care system also includes regional academic centers in Amarillo, Odessa, San Angelo, Highland Lakes, Abilene, Junction, Fredricksburg, and Seville, Spain. The center includes a school of medicine, school of nursing, pharmacy school, school of allied health, graduate school of biomedical sciences, and a physician assistant program.
The refunding portion of the bonds will take out $52 million of commercial paper and defease $48 million of debt issued by the Texas State University System on behalf of Angelo State University. Angelo State was part of the Texas State University System until the 2007 session of the Legislature approved a shift to the Texas Tech University System. The Texas State system, headquartered in Austin, operates its flagship campus in San Marcos.
Debt issued by the Tech system carries slightly higher ratings than Texas State’s A-plus rating from Standard & Poor’s and AA-minus from Fitch. Moody’s rates both systems Aa3.
Texas Tech needs additional research funding to become a tier one university on par with the University of Texas and Texas A&M University, according to Rep. Delwin Jones, R-Lubbock. But with the current session of the Legislature facing a flat revenue estimate, big funding changes are not expected.
General revenue appropriations to higher education increased 12.7% to $11.4 billion in the current biennium, compared to $10.1 billion for the 2006-07 budget.
“Given the continuing turmoil in the national economy, auto industry, housing, and financial markets, this is a cautious forecast — our wisest course is to exercise prudence, just as Texas families are doing during the economic downturn,” state Comptroller Susan Combs said in announcing the revenue estimate last month.
The West Texas economy, buoyed in the past two years by soaring energy prices, has come down to earth this year with the tumbling prices for oil and gas.
