University of Washington Offers $271M to Tight Market

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SAN FRANCISCO — The University of Washington, a top-notch credit, will hit a supply-constrained municipal debt market Wednesday with $271.3 million of bonds for refinancing and to fund various construction projects.

The university hopes to get true interest cost rates of below 4% across the whole deal and savings “well north” of 5% on the refunding that will price on Wednesday for institutional investors, according to Christopher Malins, senior associate treasurer at the university.

“There are significant original-issue premiums now, so our proceeds are expected to be nearly $300 million,” Malins said. “We are coming in at a time when the rates are very, very low and the supply is very low on a national basis, so I am hoping we will be able to have a good sale.”

Moody’s Investors Service Monday affirmed its Aaa rating on the university’s general revenue and refunding bonds. Standard & Poor’s did the same with its AA-plus rating. Both have stable outlooks. Fitch Ratings doesn’t rate the school.

The university’s high ratings may keep many regular investors at bay because of the low yields in the current market.

“The market is fairly thin in terms of supply, in terms of issuance and in terms of the secondary market. However, with that said, the market is looking for some yield,” said Kenneth Naehu, fixed-income portfolio manager at Bel Air Investment Advisors in Los Angeles. “The average investor is finding it difficult to be attracted to high-grade names at the current levels.”

Naehu said the school should have no trouble selling its debt because of the overall high demand. He said the highest demand appears to be reserved for credits rated around A, with which investors are comfortable.

The two-year municipal bond yield index closed steady Monday for its fourth consecutive trading session at 0.30%, remaining at its record low set Oct. 10. The 30-year yield was steady at 3.22%. The 10-year yield gained two basis points to 1.79%, according to Thomson Reuters.

Municipal bond yields had fallen as much as 22 basis points across the curve since Jan. 24 through Friday. Losses on Friday and Monday erased much of the gains during the rally.

The university had scheduled the deal for mid-February and pushed it up a few days due to market conditions, according to Malins. The sale is the largest scheduled this week.

The bonds are broken into two series — $237.1 million of tax-exempt and $34.2 million of taxable general revenue and refunding bonds, according to the preliminary official statement. About $28 million of the taxables is new money. Bond maturities will run as long as 30 years, with the majority of the debt sold on the long end.

New-money proceeds will be used to help fund several construction projects such as the upgraded Husky Stadium, renovation of a student center and the expansion of a hospital and student housing.

This week’s offering will help pay off $100 million of commercial paper.

Moody’s said in its report that the university has strong diversified revenues that include being the flagship state university, one of the largest research enterprises in the country, and one of the two biggest health care providers in Washington.

The agency said the school still has financial challenges, such as its growing health care operations, reliance on federal research funding and rising debt levels.

The university’s direct debt has increased to a current $2.4 billion, from $1 billion in fiscal 2007.

Barclays Capital is the lead manager on the deal along with co-managers Goldman, Sachs & Co. and JPMorgan.

The university’s bond counsel for the sale is Pacifica Law Group LLP and its financial advisor is Seattle-Northwest Securities Corp.

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