CHICAGO — The Regents of the University of Minnesota on Wednesday will sell $146 million of bonds in two issues to fund biomedical science research facilities. The deal will offer a mix of tax-exempt revenue debt supported by a state appropriation and taxable Build America Bonds backed by the school’s credit.
Barclays Capital is the senior manager on both debt sales and Dougherty & Co. is the co-manager. Dorsey & Whitney LLP is bond counsel.
The larger sale is for $110 million of special purpose revenue bonds supported by a state appropriation under the biomedical science research facilities funding program. The smaller borrowing is for $36 million of general obligation university-supported bonds for the program.
The $36 million covers the university’s required 25% matching contribution to the state’s commitment. The $110 million is payable from an annual transfer of state revenues and the $36 million carries the university’s GO pledge. The university’s agreement with Minnesota precludes it from using tuition revenues to repay the bonds.
Both issues mature in 25 years.
The university has a total appropriation for state-supported issuance of $219 million under its 2008 agreement with the state and it expects to exhaust all of it in the coming years. Proceeds from the issues selling this week will help finance various projects within a Biomedical Discovery District. The total cost for various projects located within the state-of-the-art district is $292 million.
“These issues will fund the renovation and expansion of our Center for Magnetic Resonance Research and cover a portion of the costs of a new building for cancer and cardiovascular research,” said Carole Fleck, the university’s director of debt management.
Construction will begin in the spring on the new 280,000-square-foot cancer research building in the district. The magnetic resonance center has the distinction of being home to the world’s largest imaging magnet. The university is one of the country’s top research schools, with research expenses of $600 million last year, up from $565 million in 2008 and $511 million in 2007.
The planned biomedical research facilities will be “an important driver of future growth,” Moody’s Investors Service wrote in a report earlier this year.
The university, one of the first borrowers to use the federal BAB program in spring 2009, said it expects to again tap the program for most of the $36 million issue. Some bonds on the shorter end could sell as tax-exempt depending on interest rates.
The state-supported tranche won’t tap the program. Structural details on that piece were decided after negotiations with Minnesota finance officials who have opted not to use the program on its recent new-money transactions.
The state-supported issuance received a rating of AA-plus from Standard & Poor’s and an Aa2 from Moody’s. Both are one notch lower than the state’s GO rating.
The university’s GO rating is Aa1 and AA. Neither rating agency had issued a new report by press time Friday. The university has $1 billion of rated debt.
The offering statement on the state-supported bonds does caution investors that future “unallotments” of state subsidies could affect repayment of the bonds, but Fleck said university officials are confident the state would not delay their special appropriation for debt service.
Minnesota in both the current fiscal year and last year has delayed operating subsidies to the university as part of its unallotment process, which is allowed when state revenues have fallen behind budgeted projections. The state’s action has been limited to operating subsidies.
“This is a unique, specified appropriation separate from our operating appropriation,” Fleck said.
Standard & Poor’s said its rating on the state-supported bonds takes into account the limited risk of non-appropriation. “Payments from the state to pay debt service constitute a standing appropriation, meaning that the legislature would have to act not to appropriate for there to be an event of nonappropriation,” analysts wrote.
Minnesota has delayed portions of the university’s $623 million fiscal 2010 operating subsidies this year, but the university’s strong financial position has helped it weather the action and the state has never delayed payment tied to debt service.
The school’s strengths include its position as a Big Ten public university with enrollment of more than 60,000 full-time students. 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 some 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, and substantial borrowing plans.
