CHICAGO — A high-profile stadium expansion is among the projects being funded when the University of Notre Dame brings $400 million of taxable bonds to market this week.
Featuring a 30-year bullet maturity, the bonds are among a small universe of triple-A rated taxable higher-education bonds. Located outside South Bend, Ind., about 90 miles from Chicago, Notre Dame is considered one of the strongest credits in the private higher-education market.
About $120 million of the $400 million unsecured general obligation bonds will be used for the Campus Crossroads Project, the largest building development in the university's history. The project features a $400 million development centered on the Notre Dame Stadium, home of the Fighting Irish football team.
The rest of the $210 million new-money piece of the deal will be used for various capital projects, including utility tunnels. Another roughly $190 million of the borrowing will refund tax-exempt variable rate bonds that are hedged with several interest-rate swaps, which the university plans to terminate.
The deal, which priced Tuesday, Jan. 13, hit a market hungry for a credit that offers a long maturity and top ratings, market participants said.
"This is really a powerhouse credit in the higher education private education space," said Paul Mansour, head of municipal research at Conning in Hartford, Conn. "The longer maturities really limit the market of who can buy this paper, but for taxable fixed-income buyers something like this makes an awful lot of sense. I think there's going to be strong demand for it."
The university carries Moody's Investors Service's coveted Aaa rating, but is not rated by either Standard & Poor's or Fitch Ratings.
Officials opted for taxable paper in part because in the current market yields will actually be lower than for tax-exempt bonds under the 30-year bullet maturity, said Richard Bellis, senior director of treasury services at Notre Dame.
Using taxable debt also means the university will have more flexibility in terms of use of proceeds and compliance, Bellis said.
"Right now, holding the debt to maturity, taxable is lower-yielding for us than tax-exempt, if we hold onto to maturity," said Bellis. "So there's the economic decision and there's also not being subject to the same compliance and reporting."
The university is refunding variable-rate bonds originally issued in 2003, 2005, and 2007 that are hedged with interest-rate swaps. Officials plan to terminate the swaps, which have a mark-to-market value of roughly negative $10 million, as part of the borrowing, Bellis said. The university expects savings from the bond refinancing to cover the cost of the swap termination. After the deal, the school's entire bond portfolio will be in a fixed-rate mode.
In addition to the $120 million of proceeds from this week's deal, Notre Dame plans to raise another $280 million in cash to pay for the $400 stadium expansion project, Bellis said.
A construction funding policy requires that new buildings should have 100% of money raised, with 75% in hand before the project is started. The school expects to repay the $120 million of bonds with new revenues raised by the expansion.
The Campus Crossroads project calls for three new buildings attached to the sides of the Notre Dame Stadium, one of the most popular and recognizable buildings on the campus.
With a goal of using the stadium as a way to bring together academic, athletic and recreation, the new facilities will include academic, lab and music spaces as well as an expanded student center and new ballroom. The project also calls for roughly 2,000 new premium seats and club seats for the stadium.
To investors, the university is highlighting its Aaa rating, its undergraduate pool — which makes up about 70% of its more than 12,000 full-time students — as well as a growing research base and an endowment that totals $9.2 billion.
"We're becoming more of the university of choice to our applicants," Bellis said.
Moody's assigns Notre Dame its highest rating due to its "national prominence as a premier, academically selective Catholic research university," as well as its strong balance sheet cushion, relatively moderate debt, and strong history of fundraising.
Notre Dame's annual tuition and fees for an undergraduate in 2014 totaled $46,237 or $59,461 with room and board. That's an increase of 16% and 17% respectively, since 2010, and an average annual rate of 4% over the last five years, according to preliminary bond documents.
Rising along with the tuition is the total tuition discount, which rose to 45% in 2014 from 38% in 2010, due to the school's so-called "need-blind" commitment, where it admits students regardless of ability to pay, according to Moody's.
"The growing net tuition revenues are noteworthy, as the university practices a policy of need-blind admission with a commitment to fund the unmet need," Moody's analyst Diane Viacava wrote in the ratings report on this week's deal. The school's endowment and operations fund the unmet tuition needs.
In fiscal 2014 the university produced a three-year operating margin of 11% with the 2014 margin reaching 14.5%, Moody's said.
Its $9.2 billion endowment has $1.4 billion of unrestricted monthly liquidity, or 549 days, analysts said.
"Monthly liquidity to demand debt is strong at 421%, mitigating the debt structure comprised largely of long-dated bullet maturities with relatively lower principal amortization in early years," Viacava wrote.
As for challenges, analysts warn of an intensely competitive national landscape for high-quality undergraduates, where Notre Dame relies more heavily on tuition and auxiliary revenues than other triple-A credits.
Conning's Mansour also said he monitors the demand for "well-heeled, quality" undergraduates in the higher-education sector as well as the rising costs of college across the country. Moody's also cited the intense national competition for talented students as one of the school's challenges.
Notre Dame relies on investment income for 33% of its operating revenues, which also makes it vulnerable to market downturns, Moody's warned. The university's endowment has enjoyed strong returns in recent years — including nearly 20% last year — and now totals $9.2 billion, according to Bellis.
With the deal, Notre Dame will have $1 billion of rated debt, including a $200 million commercial paper line, according to Moody's.
Wells Fargo Securities LLC is the book-running senior manager. Goldman, Sachs & Co. and Bank of America-Merrill Lynch are also on the team. Chapman and Cutler LLP is bond counsel.
