CHICAGO - The triple-A rated University of Michigan enters the market tomorrow with $225 million of debt - the first piece in about $315 million of borrowing planned through early June that includes $50 million of Build America Bonds to finance a new women's and children's hospital and stadium renovations.
The university will sell two series of bonds on Tuesday, including nearly $107 million of fixed-rate bonds and nearly $119 million of commercial paper. JPMorgan and Merrill Lynch & Co. are senior managers on the A series and Merrill Lynch is underwriter and remarketing agent on the CP. Miller, Canfield, Paddock & Stone PLC is bond counsel.
The university will follow Tuesday's sale with an issue of fixed-rate bonds in early June. They will include a $39 million tax-exempt series and a $50 million taxable BAB series. JPMorgan and Merrill are underwriters. The university plans to apply for a direct-pay 35% interest subsidy from the federal government on the BABs.
The final sizing of each of those series remains tentative and the finance team has not settled on a serial or term structure for the BABs, or on what call provisions may be included. "It all depends on the economics," said university assistant treasurer Milagros Dougan. "We are still evaluating the structure."
Proceeds from the sales will refund some outstanding debt and raise funds for the continuing construction of the $754 million replacement C.S. Mott Childen's and Women's Hospitals, a $226 million expansion and renovation of Michigan Stadium and construction of the North Quad Residential and Academic Complex and other projects.
The hospital includes a nine-story clinic and 12-story inpatient tower with a helicopter landing pad. Construction began in 2006 and is expected to be completed in 2012.
The renovation and expansion of the "Big House," where the NCAA Wolverines play, calls for an additional 400,000 square feet of facilities with new suites, indoor and outdoor club facilities, and media space. Infrastructure improvements will also be made. Once completed, the stadium will accommodate 108,000 people.
The bonds are secured by a general revenue pledge of the university that includes unrestricted revenues from tuition, fees, auxiliary revenues, investment income, and indirect cost recoveries. "The AAA rating on the university's general revenue bonds is based on a broad security pledge that includes unlimited student fees, constituting the university's broadest and strongest pledge," wrote Standard & Poor's analyst Susan Carlson.
The university main campus is in Ann Arbor, with two additional campuses in Dearborn and Flint.
Moody's Investors Service affirmed the university's Aaa credit on $1.5 billion of debt, which includes the new transaction. The university also carries top marks on its floating-rate portfolio, on which it provides self-liquidity, including $360 million of daily variable-rate demand bonds, $550 million of weeklies, and $150 million of existing CP.
The university benefits from its prestigious position as a top-tier academic and research institution with about 57,000 students, an undergraduate selectivity rate of 42%, and $572 million in grant research funding in fiscal 2008. The 900-bed University of Michigan Hospitals and Health Centers also stands out as the region's preeminent academic health center, giving it an edge in operating in a competitive marketplace.
The university's balance sheet remains strong with $7.7 billion of total financial resources in fiscal 2008, including $2.9 billion that was unrestricted. Total cash and investments rose by 80% between fiscal 2003 and 2008, to $9.8 billion, including an endowment of $7.6 billion.
Combined, they provided 6.5 times debt coverage. The university has suffered sharp investment losses of late, which will hurt its balance sheet and cut into the levels of endowment funds that will help cover operations, but overall, the university's fiscal position is expected to remain solid.
"Assuming a 30% decline in total cash and investments, the university would hold $6.8 billion of investments at the end of this year. Similarly, a 30% decline in expendable financial resources would lead to expendable financial resources of $4.7 billion, which would still cover operations 0.98 times," Moody's wrote.
Aside from coping with investment losses, the university's most significant challenges include the state's depressed economy and an ambitious 10-year, $5 billion capital program that includes projects being funded with proceeds of the upcoming sales, philanthropic support, and future debt that will peak at about $2 billion outstanding in 2014. Some projects are being slowed or canceled, however, as the university deals with economic strains.
Offsetting some of the concerns over the state's economic performance is the university's extensive draw nationally, with more than 50% of net tuition revenue coming from out-of-state state students. It relied on about $400 million in state aid in fiscal 2008 and $374 million in fiscal 2009.
More than 40% of operating revenues come from patient care, leaving the university exposed to health care sector risks, although the hospital system continues to operate profitably, with nearly 20% of its patients coming from outside its region.
