DALLAS — In its second large deal of the month, the University of Texas Board of Regents plans to take advantage of its triple-A ratings with a $373 million refunding issue scheduled to price today.
The 2010B Series bonds come 20 days after the $331.4 million Series A that raised money for projects throughout the 15-campus UT System while also refunding some debt.
The bonds produced yields ranging from 0.66% with a 4% coupon in 2012 to 3.41% with a 5% coupon in 2024. Spreads against the Municipal Market Data curve for triple-A debt ranged from 7 basis points on the short end to 17 points on the long.
“The Series 2010A transaction was very well-received in the market,” said Terry Hull, assistant vice chancellor for finance. “The system was able to lower yields due to significant investor demand. The market continues to look very attractive.”
Hull said he expects present-value savings with the refunding to exceed 5%.
Today’s retail order period will be followed by institutional pricing tomorrow. RBC Capital Markets is senior manager of the negotiated deal. The UT System serves as its own financial adviser, with McCall, Parkhurst & Horton as bond counsel.
Co-managers on the Series B are Piper Jaffray & Co., Bank of America Merrill Lynch, Ramirez & Co., JPMorgan, Loop Capital Markets and Raymond James & Associates.
UT’s revenue bonds will offer a tax-exempt option in a market flooded with taxable Build America Bonds. UT expects to issue BABs in the fall, but its next offering will be $300-$400 million of bonds backed by the Texas Permanent University Fund, officials said.
As a natural triple-A across the board, UT’s debt attracts risk-averse individuals and large institutions restricted to good credits, according to industry experts.
All UT System debt is issued in the name of the Board of Regents through two financing programs, the Revenue Financing System and the Permanent University Fund.
The RFS debt is secured by a system-wide pledge of all available revenue. About 26% of the system’s long-term RFS debt is classified as tuition revenue bonds, which are reimbursed by the state. At the start of the year, UT had $1.52 billion of PUF bonds and $4.89 billion of RFS bonds outstanding for a total of $6.42 billion.
Today’s bonds will refund other RFS debt and commercial paper used as part of the system’s five-year $8.7 billion capital improvement plan. The regents are continuing to develop the system’s nine academic campuses and six medical facilities despite growing financial pressure that has forced spending cuts and tuition hikes.
While tuition and fees have grown at an average annual rate of 8.9% over the past five years, revenue from students accounted for just 12.5% of the 2009 total, according to Fitch Ratings analysts.
“The breadth and diversity of UT’s various funding streams continues to be viewed positively by Fitch and helps to mitigate a decline in any single source, such as the decline in investment income which occurred in fiscal 2009,” they wrote.
Operating margin system-wide was a negative 1.4% in the wake of 2008’s dramatic market turbulence and the lingering effects of the September 2008 landfall of Hurricane Ike. That storm forced regents to close the UT Medical Branch in Galveston due to severe damage on the island. While education and research activities have resumed, hospital operations are more limited as large portions of the physical plant remain unusable.
After this issue, annual debt service will rise to $376.3 million by fiscal year 2012, but Fitch considers that a manageable 3% of fiscal 2009 revenue.
“While the magnitude and frequency of the system’s RFS debt issuance underscores an ongoing need to reinvest across its 15 campuses, management has a long track record of prudently implementing capital projects commensurate with available resources,” analysts wrote.
Standard & Poor’s concurs that the new debt load should be manageable.
“While this is a concern, we believe the debt level is mitigated by the system’s strong historical operating performance, large revenue base and revenue diversity, overall financial resources, steady state capital support, and still moderate debt burden,” analysts wrote. “As such, we expect the additional debt will remain manageable relative to budget.”
As it was issuing its first deal of the year on March 3, UT Regents approved tuition and fee rates for the next two academic years amid concerns that a college education was growing increasingly unaffordable.
The increases for full-time resident undergraduate students at the nine academic institutions amounted to 3.95% or $280 per academic year, whichever was greater. Proposals from five of the campuses also included student-initiated fees, such as fees to fund new student services and recreational facilities.
Regents approved tuition and fee rates for the medical campuses for the 2010-11 academic year only. Those institutions were asked to submit new tuition and fee proposals for the 2011-12 academic year.
“We believe these increases allow us to strike a delicate balance between our efforts to keep student costs affordable and to provide our institutions with the essential resources needed to keep them competitive with their peers while continuing to advance excellence,” said board chairman James R. Huffines. “We believe these increases to be appropriate.”
Meanwhile, the system has joined other state agencies in making spending cuts in an increasingly tight budget year.
Texas Gov. Rick Perry, Lieut. Gov. David Dewhurst, and House Speaker Joe Straus earlier this year joined forces in ordering state agencies to submit plans for 5% cuts to ease a $4.3 billion budget gap.
UT has been cutting costs in recent years with initiatives such as sharing business and information technology operations, refinancing bond debt, and leveraging purchasing strength for medical equipment. Last year, the system imposed a flexible hiring freeze and senior-level executive compensation freeze.
The new budget cuts will be distributed across the institutions and the UT System Administration. Of the $175.3 million in budget cuts, $78.1 million are at the nine academic institutions and $97 million at the six health care campuses.
