CHICAGO — The University of Akron in Ohio is pricing $135.7 million of bonds Wednesday that will allow the school to shift its debt into fixed-rate mode and terminate a costly interest-rate swap.
Roughly $128 million will be used to refund outstanding variable-rate debt originally issued in 2004 and restructured in 2008, according to Public Financial Management Inc., the university’s financial manager. The remainder will be used for issuance costs, bond insurance, and terminating a floating-to-fixed interest rate swap on the debt.
The swap counterparty is JPMorgan. PFM’s Bethany Pugh estimated that the swap termination could cost around $19 million, depending on the market.
“We’re taking advantage of the historically low fixed interest rates to shift more of the school’s debt into a fixed-rate structure, eliminating the variable-rate debt and the risk associated with the interest-rate swap,” she said.
The use of bond insurance will help lower the school’s borrowing costs, according to Pugh.
“The bonds that are being refunded were initially insured, and a very aggressive quote [from Assured Guaranty] made it cost effective to insure these bonds” she said.
The debt includes serial bonds that mature in 2023 and $55 million of term bonds that mature in 2029.
The University of Akron plans to enter the market next week with another $7 million of debt to finance capital projects.
The borrowing, which still must be approved by the chancellor of the Ohio Board of Regents, may be issued as taxable Build America Bonds.
Both issuances will carry insurance from Assured Guaranty. Morgan Stanley is senior manager and Vorys, Sater, Seymour and Pease LLP is bond counsel. Fifth Third Securities, PNC Capital Markets LLC, Blaylock Robert Van LLC, and Keybanc Capital Markets Inc. round out the underwriting team.
Moody’s Investors Service assigned an underlying rating of A1 with a negative outlook to the bonds. Fitch Ratings rates the debt AA-minus with a stable outlook.
One of 13 state universities in Ohio, the University of Akron is also one of the 60 largest universities in the country. It serves as the public research university for northern Ohio and has an enrollment of about 26,000.
The school has a number of benefits, including its size and diverse revenue base, but also faces challenges, credit analysts said.
The school last issued new money in 2008, and no new large borrowings are on the horizon. Unlike many Ohio schools, the University of Akron benefits from relatively minimal capital needs, Fitch said.
Other credit strengths include strong student demand and a large and diverse revenue base, analysts said. Refinancing all of the school’s debt into a fixed-rate mode and terminating costly swap agreements will also benefit the school’s fiscal position, Moody’s said.
The school’s balance sheet is considered highly leveraged due to $442 million of outstanding debt and recent investment losses.
The university faces strong competition from other Ohio schools, and suffered an operating deficit in fiscal 2009 due in part to declining tuition per student and growing debt service.
State aid made up 27% of revenue in fiscal 2009, and like other Ohio-based higher education institutions, the university faces a possible decline in state aid as the state grapples with dwindling revenues.
