Regional News

High-Grade Higher Ed in Pennsylvania

The University of Pennsylvania and the University of Pittsburgh will sell long-term bonds over the next two weeks to refinance variable-rate debt and fund various projects.

The University of Pittsburgh plans to issue nearly $421 million of new-money and refunding debt this week. The Pennsylvania Higher Educational Facilities Authority next week will sell approximately $300 million of new-money and refunding bonds on behalf of the University of Pennsylvania.

Moody's Investors Service rates both schools Aa2 with a stable outlook. Standard & Poor's assigns its AA-plus rating with a stable outlook to UPenn and its AA rating with a stable outlook to Pitt.

The double-A ratings should stoke demand for the bonds even though investors are concerned about endowment losses in the higher-education sector.

"In general, higher-ed issuers are selling bonds at higher yields and there's more pressure on them because they're exposed - especially private universities - to endowment losses, so the risk of rating downgrades is higher over the next year," said Matt Fabian, managing director at Municipal Market Advisors.

John Mousseau, vice president and portfolio manager at Cumberland Advisors, said both schools are well known and investors may be looking for more return from such credits given current market conditions compared to a water and sewer deal or high-quality general obligation bonds. "The names themselves are both good, recognizable names and I think you probably could get paid more in terms of liquidity- more for that now certainly than you did a year ago," he said.

Barclays Capital will price the Pitt bonds this week. Goldman, Sachs & Co. and Merrill Lynch & Co. as co-senior managers will price $300 million of new-money and refunding bonds during the first week of March for the University of Pennsylvania. Ballard, Spahr, Andrews & Ingersoll LLP is bond counsel on the transaction.

The University of Pittsburgh will use a portion of the proceeds to refund Series 2007A variable-rate bonds that were swapped to a fixed rate.

"The entire Series 2007 A/B bonds were fixed via forward-dated interest rate swap agreements that became effective June 1, 2007, and have fixed contractual rates ranging from 3.1385% to 3.3764%," according to the school's fiscal 2008 audited report. "To ensure that the university has the liquidity to meet its bond obligations, the university has secured standby bond purchase agreements from two highly rated financial institutions."

Bond proceeds also will help finance capital projects and reimburse the institution for infrastructure improvements made in fiscal 2008. Including the upcoming transaction, Pitt will have $1.08 billion of outstanding debt.

The school has used derivatives to hedge its variable-rate debt, with swaps totaling a notional amount of $659 million. The school has $551 million of debt in fixed-rate mode, according to a Moody's report.

"Our Aa2 rating incorporates the risks associated with the derivatives which are substantially offset by the university's healthy level of unrestricted financial resources," the report said.

Average debt service coverage is approximately seven times'

The university relies upon three main areas of funding. Grants and contracts account for 38% of revenue, while net tuition and other revenue account for 30%. Funds from the state add up to 11%.

"Research contracts and grants continue to be a major revenue driver for the university, solidifying its strategic goals," according to a Standard & Poor's report. "Sponsored research totaled $642 million in 2008, a 25.1% increase since 2003. The largest source of these grants is the National Institutes of Health and funding levels are expected to remain stable."

The University of Pittsburgh's endowment showed a 0% growth in fiscal 2008, and a 9.8% loss in fiscal 2009, through Sept. 30. Total endowment market value was $2.2 billion as of Sept. 30, the report said.

One strength for the state school is that it could be in a position to increase tuition rates in the future to help support cash flows.

"I think from a pure state financial standpoint you will probably see tuitions go up on a budget basis because they need the money and because they can get the money," Mousseau said. "It's really an underpriced asset, state universities, and they have been for awhile, and it usually takes a recession to really show it."

Total full-time and part-time undergraduate and graduate enrollment at Pitt is 34,485 for the fall 2008 semester, an increase of 2.7% from 2006. However, Moody's and Standard & Poor's cite an anticipated drop in high-school graduation rates in Pennsylvania as a challenge going forward.

Full-time undergraduate tuition for the 2008-2009 school year ranges from $12,832 to $19,620, depending upon the program, according to Pitt's Web site.

The University of Pennsylvania will use its bond proceeds to help finance a new 500,000-square-foot medical building, the Anne and Jerome Fisher Translational Research Center, set to open in 2010. The $261 million facility will house biomedical laboratories, research space, imaging services, and offices.

Located in Philadelphia, UPenn has plans to connect its campus to the city's downtown area with additional pedestrian walkways and roadways and to build research centers, though it's now reevaluating some of those plans. It also has 42 acres of land for future development located in the school's eastern expansion area.

Stephen Golding, the university's treasurer and vice president of finance, said officials are reviewing plans and might make adjustments in light of the tighter credit markets and the softening economy.

"We had put a placeholder in potentially for additional borrowing, but obviously we have to evaluate all of our capital projects at this time," he said. "We're sort of putting those plans on hold."

Bond proceeds also will refinance $46 million of Series 2008A put bonds into fixed-rate mode and retire $77 million of variable-rate Quakertown General Authority Series 2008 bonds. There are no derivatives attached to the two series. In addition, UPenn may refund about $30 million of its Series 1998 bonds, depending upon market conditions, Golding said.

With this sale, the university will have $1.1 billion of outstanding debt.

During fiscal 2008, the endowment saw a negative 3.9% return, according to Moody's.

The university's endowment is now roughly $5 billion, Golding said.

While the endowment earnings account for 9% of UPenn's operating budget, revenue from the University of Pennsylvania Health System makes up 55% of operating revenues.

UPenn's fall 2008 total full-time and part-time undergraduate and graduate enrollment is 24,107, according to its Web site. Undergraduate tuition for the 2008-2009 school year is $37, 526.

While more students and families during the economic downturn may find it difficult to finance a UPenn education, Mood's analyst Dennis Gephardt said the school should be able to withstand those challenges.

"I think with their market position where they're selecting 17% of their applicants, they're relatively much better positioned than most private universities," Gephardt said. "Finding students and families with the ability to pay the tuition will be harder, yes - there will be more students with illustrated needs, but it won't be an insurmountable hurdle for them, in our view."



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