CHICAGO — The University of Chicago is watching the market closely, hoping to sell $300 million of taxable fixed-rate bonds this week or next to raise funds for capital projects and restructure debt from a bank line of credit.
The university opted to sell taxable bonds as many of the projects don’t qualify under tax-exempt financing rules. They include a new academic center being built in Beijing and land acquisition, according to chief financial officer Nim Chinniah.
Bank of America Merrill Lynch, Morgan Stanley and Wells Fargo Securities are serving as underwriters, with Prager, Sealy & Co. as financial adviser. The bonds carry a final 20-year maturity and are selling in bullet maturities.
“We are still making decisions about the timing,” Chinniah said.
The finance team was looking for a more stable pricing environment as the market digested the impact of the European Union’s rescue package for the Euro.The university has a mix of floating- and fixed-rate bonds in its portfolio, but prefers a fixed rate on the new issue.
“We think it’s the right time for fixed-rate because of the market,” Chinniah said, citing the market and put risks of floating rates and the favorable interest-rate environment for fixed rate bonds. The school’s debt portfolio includes $1 billion of fixed-rate bonds.
Ahead of the sale, Moody’s Investors Service affirmed the university’s Aa1 rating and Fitch Ratings affirmed its AA-plus. The school will have $2.1 billion of long-term and commercial paper debt outstanding after the sale.
The university — founded in 1890 as a private, nonsectarian university by John D. Rockefeller — carries top short-term marks.
“The rating reflects UC’s strong balance sheet, diverse revenue base, and its reputation as one of the nation’s pre-eminent research and academic institutions,” Fitch wrote. “Primary credit concerns center on the university’s substantial capital improvement plan, which is expected to be funded with additional debt, as well as a modest dependency on endowment spending to balance operations.”
The school, in Chicago’s south side neighborhood of Hyde Park,has $1 billion in projects planned over the next five years.
The University of Chicago’s strengths include a strong national market position that stems from its prestigious reputation in research and graduate education, which account for about 67% of its more than 15,000 full time students.
The school received $472 million in government grants for projects in fiscal 2009, Moody’s wrote. It also manages two federal research laboratories that receive grants of more than $900 million.
Though impacted by the economic recession and poor market earnings in 2008, the university’s fiscal position remains strong.
It benefits from favorable operating and cash flow with an average operating margin of 4.4% in fiscal 2009 and similar results expected in fiscal 2010.
The school has total financial resources of $4.7 billion and unrestricted liquidity of $1.13 billion — providing cash on hand to cover 162 days. Fundraising remains sound with a three-year average for gift revenues of $372 million in 2009. That figure includes the university’s largest donation ever — a $300 million gift to its business school.
Moody’s said the school’s challenges include a rising debt load and reduced financial resources that give it a thinner cushion than similarly rated universities. The school is grappling with a defined pension plan that is severely underfunded at 51%.
The University of Chicago also has a debt structure that presents challenges because principal is heavily back-loaded. It cut expenses by $45 million in 2009 and by $143 million this year due to the economy and a weakened endowment.
Moody’s said at the current rating the university’s debt capacity is limited based on its balance sheet.
