DALLAS — The University of Texas System is issuing $285 million of gilt-edge revenue finance system bonds this week, including the first long-term debt for a new Austin medical school.
The deal begins with a retail order period on Monday, followed by institutional pricing Tuesday, said Terry Hull, associate vice chancellor for finance.
Market conditions appear to be trending positively for UT's top-rated bonds, Hull said.
"Given the lack of supply, the current market looks favorable, especially for a high-grade issue with good liquidity," he said.
The deal comes five weeks after the UT System priced $245 million of bonds backed by the state's Permanent University Fund, drawing a true interest cost of 3.47% on triple-A rated bonds that reach final maturity in 2033.
"The PUF transaction received very strong investor demand, allowing the system to further tighten spreads and increase present value savings," Hull said. "Retail investors generally prefer sub 5% coupons, which was evident on the PUF bond transaction. We expect similar demand on this transaction."
Wells Fargo Securities is book-runner on this week's deal, with Pamela K. Clayton, director of the education and nonprofit group, and Managing Director Sally Eddy Bednar as lead bankers.
Clayton, who has 25 years' experience in public finance, is a chartered financial analyst and graduate of UT who formerly served in Hull's position as assistant vice chancellor of finance.
Bednar has been managing director at Wells Fargo Securities since October 2012. Previously with Morgan Stanley, she has 18 years of experience in public finance.
Piper Jaffray is co-senior manager with seven other firms in the syndicate.
Attorney Richard Donoghue, with McCall, Parkhurst & Horton's Austin office, acts as bond counsel.
The bonds carry triple-A ratings from all three rating agencies with stable outlooks.
Before this sale, UT System had about $5.8 billion of revenue finance system debt outstanding, including notes and commercial paper. PUF debt makes up about $2.1 billion of the total indebtedness.
"The system has a relatively conservative debt portfolio for a higher education organization of its size," Moody's Investors Service analyst Karen Kedem noted in her ratings report with co-analyst Susan Fitzgerald. "Of the system's nearly $8 billion of pro-forma debt, approximately 75% is in a fixed rate mode and all variable rate bonds are swapped to fixed rate."
At the end of 2013, UT System $4.6 billion of discounted daily liquidity and $2.4 billion of weekly liquidity to cover $1.9 billion of commercial paper and variable rate demand bonds outstanding, according to Moody's.
"The system's daily liquidity is highly concentrated, with one money market fund accounting for nearly 60% of discounted daily liquidity, exposing it to operating or investment issues unique to the individual fund or sponsor," Kedem noted. "After removing the largest fund, discounted daily liquidity drops to $1.9 billion."
The system has four times the pledged revenue needed to cover debt service on a three-year average, according to Moody's.
"The system's robust financial reserves, bolstered by sizeable oil and gas royalty income and healthy philanthropic support, will continue to provide strong coverage of debt and operating expenses," Kedem said. "In fiscal year 2013, annual gift revenue of more than $919 million marked a record high, with large campaigns underway."
The Permanent University Fund supporting the UT and Texas A&M systems has grown rapidly in recent years to nearly $19 billion. Two-thirds of the PUF is reserved for the UT System, which includes nine universities and six healthcare facilities serving 213,000 students and more than 2.6 million patients.
The fund is expected to generate nearly $1 billion in annual income, which can be used by the UT and A&M systems as the "Available University Fund."
"The PUF's strong projected growth rate combined with the system's continued healthy cash flow and modest borrowing plans will help maintain the system's strong balance sheet position despite growing other post-employment health and pension obligations," Kedem wrote.
This week's deal will include funds for UT's new Dell Medical School, which will provide what most Austinites consider a missing piece of the UT campus. The medical school will be built along Waller Creek, neighboring UT's Erwin Events Center and immediately south of the main campus.
The UT Board of Regents recently approved designs for the first phase of the medical school by the architectural firm Page Southerland Page.
The medical school campus construction coincides with $146 million of bond-financed work by the city of Austin to prevent flooding on Waller Creek. The project includes a mile-long tunnel for diversion of the creek during times of high water. The tunnel, measuring 26 feet in diameter and running 70 feet underground, is expected to be completed this year. Financing includes a tax-increment zone that will take advantage of development now possible in the former flood zone.
The new UT medical campus will include a 480,000 square-foot hospital built by Seton Healthcare Family as a teaching hospital. The architectural firm HKS, which has designed a number of other medical facilities in Texas and elsewhere, is drawing plans for the new hospital. Construction begins this year, with completion scheduled for 2017.
The university plans to build a small education and administrative building for the medical school, and an office building, a research center and parking garage between Waller Creek and Trinity Street to the west. UT also will build a new chilling station.
The UT Board of Regents has pledged at least $25 million in continuing support and $5 million annually for eight years for faculty recruitment and support.
Voters in Travis County, including Austin, voted in 2012 to provide $35 million of financing for the new medical school through property tax assessments.
The medical school takes its name from former UT student Michael Dell, who started his company, Dell Computer, in a dorm room. Dell and his wife Susan pledged $50 million to the medical school through their philanthropic foundation.
Adding an Austin medical school to the ones at UT branches in Dallas and Galveston is expected to stimulate further contributions from alumni and benefactors, analysts have said.
But Moody's also warned that "the system's large and growing exposure to the healthcare sector (40% of operating revenues in FY 2013) comes with associated credit challenges, including potentially more volatile operating performance and susceptibility to regulatory and payer changes."
