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Arizona State U. Seeks Room to Grow With $112M Deal

DALLAS — Arizona State University plans to issue $112 million of revenue bonds to raise new money for its Tempe and Phoenix campuses and to provide interest-rate savings by refunding outstanding debt.

The deal comes a week before the Arizona Legislature convenes to consider spending measures for the state’s colleges and universities, along with other programs that have struggled with funding shortages in recent years.

The bonds, to be priced Wednesday through negotiation with senior manager Wells Fargo Securities, will come in two series, with Series A expected to be about $86 million, and the taxable Series B at $26 million. Series A reaches final maturity in 2043, and Series B in 2025.

RBC Capital Markets serves as financial advisor. JPMorgan and Morgan Stanley are co-managers, and Ballard Spahr is bond counsel.

The bonds are rated AA by Standard & Poor’s and Aa3 by Moody’s Investors Service with stable outlooks.

“The university will need to continue its focus on recording solid operating performance in order to manage state appropriation reductions and deferrals, with limited additional debt capacity at the current rating level absent growth of financial resources and revenue to cover debt service,” wrote Moody’s analyst Mary Kay Cooney.

Among the university’s strengths are its strong enrollment growth to 73,062 full-time students and strong growth net tuition per student to $10,395 in fiscal year 2012, up 16% over fiscal 2011, Moody’s noted.

The revenue growth partly offset declines in state appropriations, analysts said.

In the legislative session opening Jan. 14, the Arizona University System is seeking an 11.6% increase in state financial support. In addition to ASU, the system includes the University of Arizona based in Tucson and the Northern Arizona University in Flagstaff.

ASU is seeking 10.9% higher appropriations. The university system has also requested two one-time investments for fiscal 2014 that do not require an ongoing obligation from the state.

The system’s 2012 fiscal year state appropriations of $333 million were down 18% from fiscal 2011. That translated to $4,394 per student for 2012, down from $7,880 in 2008.

For fiscal 2013, ASU is budgeting for $312 million in state appropriations. It is also suffering delays in cash funding from the state.

“We anticipate that, during the next two years, the university will maintain positive operating margins in line with previous years’ results and that enrollment will remain stable,” said Standard & Poor’s credit analyst Jessica Lukas.

About $89 million of the Series A and B bonds will be new money, and $23 million will refund outstanding debt. The balance will cover costs of issuance.

Among the new projects will be a student services facility expansion at the main Tempe campus, a new student services facility at the downtown Phoenix campus, and renovation of the historic post office in Phoenix for use as a downtown campus student center.

The deal will also finance a mixed-use retail and academic building called College Avenue Commons on the north side of the Tempe campus. Funding for that project will include public donations and $16 million of bonds to be issued in the fall.

The Series 2003 South Campus Group LLC student housing revenue bonds for the ASU South Campus Project will be refunded with a portion of the Series 2013A bonds. The 2013 bonds will also refinance all or portions of the Series 2003 and 2004 revenue bonds.

With this week’s deal ASU will have outstanding about $1.22 billion in direct debt and $497.5 million in lease-related debt for total of $1.72 billion, according to S&P.

The university estimates that about 35% of its direct debt is state-supported.

“Maximum annual debt service burden of ASU-issued debt is above average but manageable in our view, at 6.9% on a MADS of $111.4 million (in 2014), increasing to a level we consider fairly high, 9.1%, when component unit debt is added,” S&P’s Lucas wrote.

The system revenue bonds carry a rate covenant requiring the university to provide at least 1.5 times coverage of maximum annual debt service.

Though its main campus is in the Phoenix suburb of Tempe, ASU is making increasing use of its downtown Phoenix campus. The university’s Sandra Day O’Connor School of Law is expected to move from the Tempe campus to its downtown campus in 2016.

“Moving downtown is the next logical step,” Douglas Sylvester, dean of the law school, said in a prepared statement. “In addition to providing us with modern space, moving downtown will further increase job opportunities for our graduates by bringing us closer to many of the region’s largest private and public employers, and will also enhance the wide array of hands-on clinical opportunities, externships and pro bono experience we provide our students.”

In December, the Arizona Board of Regents, which oversees all three university systems, approved ASU’s capital improvement plan that includes the new Phoenix building.

The Phoenix City Council approved city staff to begin negotiations and to enter into contracts with ASU to develop the Arizona Center for Law and Society on city-controlled property.

Phoenix is investing $12 million in the project, which is expected to cost about $120 million. 

The facility will also house continuing legal education facilities, community legal services, public retail amenities, and around 200 to 250 parking spaces.

“This is an investment that makes sense for ASU College of Law, its students and the city of Phoenix,” said Councilman Bill Gates.

Construction is expected to begin in the spring of 2014, with a completion in late 2015. It should open the following spring.

Later this month, Northern Arizona University is also planning a $40 million refunding of certificates of participation.

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