CHICAGO - Northwestern University is offering more than $600 million of its gilt-edged paper to taxable and tax-exempt buyers beginning this week to refund some debt and raise financing for its $2.6 billion capital program.
After selling $500 million of taxable bonds Wednesday, the university will return in the coming weeks with a $123 million tax-exempt sale through the Illinois Finance Authority maturing in 2028. About $145 million will refund bonds from 2006 and the remainder represents new money.
The debt represents an unsecured general obligation of the university on par with outstanding bonds and commercial paper.
Proceeds of the new issuance are earmarked for a series of new and ongoing projects. The capital plan covers academic, athletics, housing and infrastructure-related needs with funding coming from a mix of gifts, grants, internal resources and debt.
Notable projects in line for funding from the new sale include a new Kellogg School of Management building on the unversity's Evanston, Ill. campus that's slated for completion in 2016 and a new $400 million biomedical research building in downtown Chicago for which the school will break ground next month.
The financing marks the university's return to the tax-exempt market after relying on the taxable market for its most recent sales in 2012 and 2013 due to the narrow spreads on the long end for a high-grade credit.
"The primary reason we've used the taxable market is there hasn't been a big difference in interest rates," said Ingrid Stafford, university treasurer and vice president for financial operations.
While cost has been the primary driver, the lack of Internal Revenue Service rules attached to taxable debt provides added benefits. "There's a long list of projects being funded and they are being funded through various sources," so the use of the taxable market frees the school of some tracking requirements on spending, said the university's financial advisor John Peterson, of William Blair & Co.
In the current market, the spreads are at their narrowest between the two markets on the longer end so the university decided to tap tax-exempt buyers for a tranche on the shorter end of the yield curve where there are some interest rate savings.
The taxable piece is divided into two term bonds dated 2038 and 2048. While pleased with the results of its past sales in the taxable market, the university is hoping the new sale will draw more attention as both terms are index eligible due to their size while only one piece of its last sale was index eligible, Peterson said.
Morgan Stanley, Goldman Sachs, and Wells Fargo Securities are co-senior managers on the taxable transaction with JPMorgan and Loop Capital Markets LLC serving as co-managers. Bank of America Merrill Lynch and RBC Capital Markets will senior manage the tax-exempt piece. Siebert Brandford Shank & Co. LLC is serving as co-manager.
The university had been plotting its return to the market for some time as part of its long-term capital program. Its board's decision last year to move forward with the biomedical research building to serve programs at the university's Feinberg School of Medicine was a factor that contributed to the timing of the sale, Stafford said.
The project was bolstered by a $92 million gift from Northwestern trustee and alum Louis Simpson and his wife Kimberly Querrey. The biomedical research facility is being built on the site that previously housed Northwestern Memorial Healthcare's former Prentice Hospital for women and will be connected to the Robert H. Lurie Medical Research Center.
The new state-of-the-art research center, comprising approximately 600,000 square feet, will have nine laboratory floors and will be able to accommodate an additional 15 laboratory floors. The facility will house scientists working in cancer, heart disease, neurodegenerative disorders and genetics.
The couple have donated a total of $118 million to the university's capital campaign. The combined gifts top the $100 million that came in January from Roberta Buffett Elliott, the sister of Warren Buffet.
To help finance its capital program as well as scholarship and program initiatives and other financial needs, the university formally embarked last year on a capital campaign with the goal of raising $3.75 billion by 2019. It's received commitments to fund $2.2 billion so far with debt issuance and other revenue sources rounding out its financing plans.
The current borrowing should see the school through several years with the university then "assessing the means for financing" additional projects, Stafford said.
Ahead of the sale, all three ratings agencies affirmed the university's triple-A marks and stable outlook.
"The AAA rating reflects our view of Northwestern's exceptional demand and enrollment profile, coupled with its track record of strong full-accrual operating performance," said Standard & Poor's analyst Jessica Wood.
While the university's growing debt load poses a challenge, its strong balance sheet offsets the strain. "In our view, the university's recent balance sheet growth and maintenance of strong operating performance have provided sufficient cushion to absorb both the university's planned capital spending and this debt issuance," Wood said.
Founded in 1851, Northwestern University is a highly selective, private, nonsectarian university with six undergraduate schools, 30 major research centers, and three professional schools that includes medicine and the law. It has an enrollment of 16,000 and operates a third campus in Qatar.
Moody's Investors Service said the university's top marks are supported by excellent balance sheet reserves bolstered by impressive growth in unrestricted financial resources and liquidity from healthy cash flow, strong gift revenue, royalties, and favorable market returns. Good governance and management, its national prominence and draw, and research awards of $600 million in fiscal 2014 also contribute to the rating.
The university's rising debt level to fund substantial capital projects and strong competition to draw top students pose credit challenges as do federal research funding pressures and a debt structure with bullet maturities.
Stafford said the university seeks to carefully weigh each project in its capital program putting in a place "a plan as to how we will pay for it" so as not to over burden its balance sheet.
Fitch called the university's debt load manageable and said its considerable financial cushion offsets concerns about bullet maturities. With the sale, the school will be eliminating a bullet maturity in 2043.
The university faces some exposure risk in federal research funding and material erosion to its "strong financial cushion and/or a material decline in operating performance, which depends in part on annual endowment distributions, while not currently anticipated, could pressure the rating," Fitch said.
The university's strong financial profile is underscored by its available cash and investments of $9.12 billion in fiscal 2014, up 20.6% from a year earlier and 71% since 2010. Its operating margin, including endowment spending, was a strong 16.3% in fiscal 2014, Fitch said.
Student-generated revenues, which include tuition, fees and auxiliary receipts, are the university's largest funding source, and made up 26.5% of unrestricted operating revenues in fiscal 2014. Other significant funding sources include grants and research contracts and investment income. Gifts and contributions contributed 19.8% to operating revenue.
Following the new borrowing, Northwestern will have about $1.88 billion in outstanding debt that includes $1.66 billion of bonds, $120 million of CP, and non-cancellable operating leases for $98 million, Standard & Poor's said. The university has three fixed payer interest rate swaps on $125 million of debt with counterparties Morgan Stanley, Bank of America, and JPMorgan. As of last August, the swaps were negatively valued at $25.5 million.
Northwestern has eliminated its direct exposure to health care risks through the transfer of its health care assets.
