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Bonding For New Biolab

APR 21, 2011 7:07pm ET
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The Massachusetts Development Finance Agency this week will issue $353.4 million of tax-exempt and taxable debt on behalf of the Broad Institute Inc., a biomedical research facility, to help finance a new laboratory and building in Cambridge.

This is the first time the Broad Institute is accessing the capital markets. The institution's revenues, most of which come from federal National Institutes of Health grants, will pay down the bonds. The institute is a 501(c)(3) nonprofit research corporation.

Morgan Stanley on Wednesday will begin institutional pricing following a one-day retail order period on Tuesday. Edwards Angell Palmer & Dodge LLP is bond counsel. Public Financial Management Inc. is financial adviser.

Standard & Poor's and Moody's Investors Service rate the transaction AA-minus and A1, respectively.

Both agencies assign a stable outlook to the credit.

The institute does not plan on using bond insurance for the deal, according to chief financial officer Patricia Fillippone.

The timing of the bond offering is mostly due to the need to generate cash to help finance Broad's new facility. Chris Doyle, managing director at PFM, said the market's low issuance levels and the novelty of the credit could help the credit at pricing.

"Certainly volume has been light, relatively speaking, and I think for a highly rated new name coming to market, that helps us," Doyle said. "It's a new name for investors to potentially add to their portfolios."

The bond sale includes $269.9 million of tax-exempt Series 2011A revenue bonds and $83.5 million of taxable Series 2011B revenue bonds.

The tax-exempt portion will offer serial maturities from 2020 through 2026 and two term bonds — one for $63.8 million maturing in 2031 and the second for $127.7 million maturing in 2041, according to the preliminary official statement. The taxable bonds will mature annually from 2012 through 2020.

The proceeds will help finance a new 12-story laboratory building with 360,480 square feet of space adjacent to the institute's existing headquarters.

A new walkway connector will link the two facilities. The $929 million project will consolidate the organization's three locations onto one site.

Proceeds from the bond sale will also refinance an outstanding bank loan.

Construction is set to begin in early 2012 and Broad officials anticipate moving into the new location during the second quarter of 2014.

Since this is the first time that municipal bond investors are looking at the credit, the institute is holding investor calls with potential buyers to help educate investors about the structure of the deal and Broad.

Like colleges and universities, Broad has an endowment.

The Eli and Edythe Broad Foundation gave the institute $100 million for its endowment in July 2009. The foundation will make additional endowment allocations in 2013, 2016, and 2020.

"We're working with the investors to make sure that they're comfortable with the credit and making sure they're comfortable with the comparables to universities and higher eds," Fillippone said.

While colleges and universities have tuition revenues to help pay down outstanding bonds, Broad's main revenue stream comes from federal grants it receives from the National Institutes of Health.

In 2010, the research organization received $167.4 million of federal funds — including $166.2 million of NIH funds — along with $49.1 million of non-federal support from charitable foundations and private corporations, according to the POS.

Overall, NIH funding has increased to $166.2 million in 2010 from $84.4 million in 2006. Non-federal funding has also grown to $49.1 million in 2010 from $17.3 million in 2006.

While Broad is working towards increasing private donations and developing relationships with pharmaceutical companies to help diversify its revenue sources, NIH grants account for a large portion of the institution's funding.

"The institute is heavily reliant on sponsored research funding from the federal government, in particular the NIH," according to a Moody's report.

"Given an expectation of slowed growth of federal research funding, securing federal grants and contracts could become increasingly challenging for all research institutions. Although the institute has demonstrated a rapid increase in sponsored research funding in recent years, we expect the pace of future growth to slow substantially."

Broad aligns its research programs with the goals of the NIH, which helps to maintain and continue NIH funding.

The institute conducts biomedical research for cancer, chemical biology, psychiatric diseases, infectious diseases, and medical and population genetics. It is one of the highest volume genome sequencing centers in the world, according to the POS.

"There's always a risk that NIH funding could decline, but historically they've had a track record with their grants and NIH funding for 10 years or more," said Standard & Poor's analyst Jennifer Soule. "So they have a history with this revenue stream and it's been consistent and growing for them for many years and through some turbulent times."

In addition, a portion of NIH grants reimburses Broad for facility costs, such as its current lease payments and future debt-service costs for the Series 2011 bonds that will help finance the new laboratory and office space.

"They're very careful to match the money they receive through grant funding to meet debt service and lease payment obligations," Soule said.

The Broad Institute is an independent research organization and partners with the Massachusetts Institute of Technology, Harvard University, and Harvard's affiliated hospitals.

The presidents of MIT and Harvard sit on the institution's board of directors. The institute was initially a department within MIT but became an independent, nonprofit entity on July 1, 2009.

While NIH grants and other similar federal funding programs are initiatives that could face cuts in order to help balance the federal budget, PFM's Doyle said Broad's affiliation with MIT and Harvard and its strong presence as a research entity will help it maintain future funding.

"Obviously the federal budget is being scrutinized pretty closely and that's going to be the case going forward probably," Doyle said. "The difference is that Broad is uniquely well positioned in terms of its stature and the type of biomedical research that it does. They are uniquely well positioned to be in good shape as far as federal funding is concerned."

MassDevelopment is heading to market with the Broad deal after announcing on April 14 that Marty Jones will become the agency's next president and chief executive officer.

Jones is the current president of Corcoran Jennison Co., based in Boston. She worked in the U.S. Department of Housing and Urban Development in both the Washington, DC and Boston offices and sits on several real-estate boards. Jones is a graduate of Brown University.

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