University of Minnesota, an Early BAB User, Goes Back for Seconds

CHICAGO — The University of Minnesota, one of the first borrowers to use the Build America Bond program last spring, enters the market today with $36 million of fixed-rate, new-money bonds that will again tap the federal stimulus program.

The University of Minnesota ­Regents will sell about $28 million of taxable BABs and $9 million of tax-exempt bonds, although the division could change. “The split depends on investors and interest rates,” said Carole Fleck, the university’s director of debt ­management.

Piper Jaffray & Co. is serving as the underwriter. Like last year, the BABS will carry a 10-year call provision. The university last spring sold about $35 million of BABs as part of a larger $85 ­million deal.

The school enters the market with far more comfort about the program than it did last April when it, along with the University of Virginia, were the first to publicly offer securities under the new program.

“Last spring everyone was still waiting for the regulations and the program was still so new we just didn’t know if there would be investor interest,” Fleck recalled. Now that more than $60 billion of BABs have been issued since last April, “we feel very comfortable now.”

The university submitted the required paperwork to the federal government to receive the 35% direct-pay interest subsidy for its first debt service payment on that transaction, which was due Dec. 1, and received it in a timely fashion, Fleck said.

Ahead of the sale, Moody’s Investors Service affirmed the credit’s Aa2 rating and Standard & Poor’s affirmed its AA. The university will have a total of $938 million of debt following the sale.

The school’s strengths include its position as a Big 10 public university with enrollment of more than 60,000 full-time students, up 3.4% from a year earlier, and research expenses of $600 million, up from $565 million the year before.

It also benefits from total financial resources of $2.7 billion, positive operating performance, and a well-diversified revenue base.

Its challenges include the risks of managing a debt portfolio with $318 million of variable-rate debt supported by self-liquidity or standby bond purchase agreements, unrestricted resources that provide just a thin cushion for debt and operating expenses, substantial borrowing plans over the next year, and a decline in the number of in-state high school graduates through 2013.

Officials have plans to issue up to $283 million in the current fiscal year for various projects, including its new biomedical research facilities. State lawmakers have approved covering 75% of the total $292 million price tag for the facilities. The school will issue $53 million next month for the project and will follow that issue up with another $94 million in the fall.

The university faces liquidity pressures from state payment delays, although those delays are not expected to impact its credit.

The state recently announced that it would delay March public education payments until May as it grapples with poor revenue collections, including $52 million due to the university, which expects a total of $623 million from the state in fiscal 2010.

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