SAN FRANCISCO — The University of California will sell $760 million of mostly taxable Build America Bonds next week to help finance upgrades to three medical centers.
The school system’s pooled revenue bonds pricing on Tuesday will be split into three series: $700 million of BABs, $50 million of tax-exempt paper, and $10 million of taxable debt.
Some of the money from the sale will be used to refund University of California San Diego Medical Center bonds, while the majority will help finance part of the construction of the University of California San Francisco Medical Center at Mission Bay. Another piece of the deal will go to pay for building and equipping a medical building adjacent to University of California Los Angeles Medical Center and Orthopedic Hospital in Santa Monica.
Because the offering comes amid a rush of BABs and California debt before the end of the year, the market may have less appetite for such a deal than in recent months.
“The Build America Bond market is on the weaker side these days because folks are anticipating a tremendous uptick in supply between now and the end of the year,” said Michael Pietronico, chief executive and head of fixed-income research at Miller Tabak Asset Management.
“When you factor that in with the idea that the California calendar should be heavy, that deal may struggle a bit.”
BAB issuance is expected to accelerate in November and December as the federal stimulus bond program nears expiration at year’s end.
Despite the rising tide of supply, the university still expects a good result because of the solid finances backing the bonds.
“We are aware of the [BAB] market dynamic,” said Sandra Kim, executive director of external finance, “but we are confident we will have a successful outcome.”
The medical center bonds will be backed by gross revenue from the university’s five medical centers, which totaled $5.9 billion in fiscal 2010. The hospitals previously issued debt individually, secured by their own revenues, Moody’s Investors Service said in a recent report.
With 220,000 students, the university also does more than $4 billion of research annually and generated over $5 billion of net patient revenue in the last fiscal year at its medical centers.
It also has strong financials, with $1.7 billion in operating cash flow, $2.5 billion of unrestricted financial resources, and a short-term investment pool of more than $10 billion, according to Moody’s.
Moody’s rated the bonds Aa2 with a stable outlook. Standard & Poor’s gives them a AA-minus, also with a stable outlook.
“The rating on the medical center pooled revenue bonds reflects our assessment of the strong performance of the medical centers on a combined basis,” Standard & Poor’s analyst Jessica Matsumori said in a recent statement.
But according to Moody’s, the school’s significant capital needs will likely result in further borrowing, even as outstanding debt has grown to more than $12 billion in fiscal 2010 from $8.3 billion in 2006.
In September, the university sold $670 million of mostly taxable BABs to help pay for campus upgrades.
Moody’s noted that the university still relies heavily on state funding, has had to shoulder rising pension costs, and is exposed to the health care sector.
Due to budget constraints, the university recently said it would reduce the size of incoming freshmen enrollments on most campuses.
Moody’s said the university’s retirement benefits are likely to swell and need more funding over time. As of July 2009, the system’s full actuarial accrued liability was $14.5 billion, it said.
Barclays Capital and Citi will be the joint book-runners on the deal. Orrick, Herrington & Sutcliffe LLP is bond counsel.
