SAN FRANCISCO — The University of California will sell $900 million of revenue bonds next week for refinancing and to fund various projects across six campuses, including the renovation of the storied Pauley Pavilion basketball arena at the university’s Los Angeles campus.
The deal — split into two series of $800 million of tax-exempt and $100 million of taxable bonds — will price on Thursday, according to Sandra Kim, executive director of capital market financing for the university.
Of the total sale, $675 million will be used to refund and restructure existing debt and $225 million will be new money.
Kim said the university is optimistic about how the negotiated sale will go in the current market.
The deal brings double-A level paper into a market still hitting all-time lows. The 10-year municipal bond closed just six basis points above its record low on Wednesday of 1.73% for the third day, while the 30-year hit a new record low of 2.91%, according to Municipal Market Data.
“They are going to get a warm reception,” said Kenneth Naehu, a portfolio manager with Bel Air Investment Advisors in Los Angeles. “With all that is going on in several cities in California being named as 'on the brink,’ if you will, name and quality is becoming obviously more important than yield and has been for some time now.”
Naehu said there will be a lot of redemptions and cash available through the summer for bonds as the market is starved for yield.
In September 2010, the university sold similar limited-project revenue bonds at interest rates from 2% to 5% and prices from 99% to 116% of par on maturities extending to 2024, according to the Municipal Securities Rulemaking Board.
Last month, a $100,000 block of those bonds maturing in 2022 sold for 119.58% with a yield of 2.279%, according to MSRB trading data.
Prior to the sale, the University of California had $1.8 billion of outstanding limited-project revenue bonds, which are backed by money generated from the financed facilities.
Bond proceeds will finance student housing and parking structures, as well as the renovation of the Pauley Pavilion, which will host UCLA basketball again this fall after the teams spent a year in temporary quarters during construction..
Moody’s Investors Service rates the bonds Aa2, Standard & Poor’s rates them AA-minus and Fitch Ratings has them at AA.
Fitch in a report released last week called the university’s bonds a “strong credit profile” supported by its solid finances, which include strong cash flow, diverse sources of revenues and a manageable debt load.
The university’s reputation fuels student enrollment that in turn helps generate the strong revenues from the facilities being funded by the bonds, according to Fitch.
Similar views were echoed by the other ratings agencies.
Standard & Poor’s said in its report that the school has also diversified its debt portfolio after formerly sticking to fixed-rate, 30-year bonds in the past for capital projects.
“These various structures provide diversity to the system’s debt profile and have lowered the system’s internal cost of capital, but while the system continues to maintain a manageable annual debt burden, the substantial new debt has placed added pressure on the system’s balance sheet,” Standard & Poor’s said.
S&P analysts said any further “dilution” of the balance sheet or accelerated issuance would be a sign of credit weakness.
The rating on the limited-project revenue bonds is one notch below the rating on the university system’s general revenue bonds because of a more narrow revenue pledge.
The payments on the limited project bonds are also subordinate to the university’s general revenue bonds, a $215 million credit facility and two $500 million swap contracts, according to S&P.
In total the university had $11.9 billion of different types of revenue bonds outstanding, and $2.45 billion of lease revenue bonds issued through the California State Public Works Board for school facilities. In total, the school’s debt load is $17.03 billion.
Both S&P and Fitch noted the problems created by the declining funding from the state.
Fitch said appropriations from the state to the university declined by $750 million to $2.27 billion for fiscal 2012.
The California budget adopted for the fiscal year starting July 1 relies on temporary tax increases that will be put to voters in November.
If voters reject Gov. Jerry Brown’s tax initiative, the university system will be hit with $250 million in cuts; if it passes the university will get $125 million in additional state funds for fiscal 2014 in return for not raising tuition, according to Fitch analysts.
The University of California put in place many changes to make up for the loss of state funding, including raising tuition and reducing staff.
Fitch said the combined cost-savings measures have closed about 26% of the system’s $1.1 billion budget gap for fiscal 2012.
“In Fitch’s view, the management team has a demonstrated history of making necessary budget adjustments in response to a weaker state funding environment,” the report said.
Barclays Capital is book-runner on the revenue bond issue. Co-managers are JPMorgan and Stone & Youngberg, a division of Stifel Nicolaus & Co. Orrick, Herrington & Sutcliffe LLP is bond counsel.
