CHICAGO — The Ohio State University is teeing up $300 million of new-money bonds that could include a rare century bond issuance, which would mark the university's second 100-year debt issuance to date.
The Big Ten school is expected to decide this week whether it will structure $150 million of the $300 million borrowing as taxable century bonds.
The remaining $150 million is expected to come as tax-exempt variable-rate demand bonds supported by the university's own liquidity. All the debt will be backed by OSU's general receipts, excluding state aid.
The borrowing will finance capital improvements, with the bulk of the proceeds raising funds for the expansion of the university's health system.
Bonds with a 100-year bullet maturity remain rare in the muni market, but OSU's would come just weeks after another Ohio issuer floated similarly lengthy bonds.
The prestigious double-A rated Cleveland Clinic issued $400 million of 100-year bonds last week, marking the first such issuance by a health care issuer. The single taxable bullet maturity was priced to yield 4.838% on a 5% year coupon in 2114, about a 170 point spread to that day's Municipal Market Data triple-A 5% scale.
If OSU opts to issue centuries, it will be its second such borrowing. In 2011, the university sold $500 million of bonds with a 100-year bullet maturity. It was the first such deal for a public university. The 2011 bonds were priced to yield 4.85% on a 5% coupon in 2114, 170 basis points above 30-year U.S. Treasuries, according to data.
Highly rated universities have traditionally been the main issuers of the long-rated debt. In 2012, Massachusetts Institute of Technology and the University of Southern California both floated 100-year bonds. Double-A rated USC saw an interest rate of 5.25% on its $300 million issue - the lowest rate ever paid for a century bond. The $750 million, triple-A rated MIT issue saw a 5.65% yield.
In July, the District of Columbia water and Sewer Authority sold $350 million of century bonds, the first ever issued by a public entity. They paid 4.81% after being heavily oversubscribed, garnering more than $1 billion of orders.
One of the largest universities in the country, OSU is one of the country's top research institutions and operates the largest athletic department in the country.
It's rated double-A by the three major ratings agencies, which praise the school for its size, ability to attract students, and strong financial management. Revenues in 2014 are expected to total more than $5 billion, with student enrollment topping out at 65,000.
With a relatively new financial management team in place, OSU has nearly doubled its debt to $2.9 billion over the last five years, including notes and capital leases, according to ratings agencies. In another first for a public university, OSU in 2012 privatized its parking system. The move raised $483 million.
Maximum annual debt service totals $744 million, with a large bullet maturity in 2040 from Build America Bonds issued in 2010, according to Standard & Poor's, which rates the school AA.
Without the 2040 bullet maturity and the final maturity of the two century bonds, maximum annual debt service is $195 million in 2030, which S&P said it views as "moderately low," at 4% of 2013 operating expenses.
If the university opts to issue the 100-year bonds, nearly a quarter of its debt portfolio will be made up of the long-dated debt. Ratings analysts warned that the long bullet maturities could reduce financial flexibility, but say that the university's strong market access and experienced financial team offset the risk.
Officials from OSU said Monday they had not yet decided on whether to issue the taxable century bonds, which would mature in 2114, or float bonds with a more traditional maturity. If the maturity is 30 years or less, the bonds will be tax-exempt, officials said.
In addition to nearly doubling its debt, OSU's debt portfolio now includes more longer-dated debt and bullet maturities than ever before, analysts said.
Board involvement and strong internal policies managing the debt are important for universities considering 100-year bonds, said S&P analyst Ken Rodgers.
"In general we desire to see first of all that the board has approved the finance plans; it's totally aware of what the institution is doing and has given due consideration to some of the underlying economic and financial implications of issuing a century bond," Rodgers said in a telephone interview. "We'd like to see that they've taken steps to assure that they have a prudent investment policy in place so the institution could demonstrate that it could have sufficient funds to retire the obligation at the end of 100-year period and pay interest during the course of it."
University officials presented the century bond issue to the board at its August meeting as a way to take advantage of "historically low interest rates," according to board minutes.
Proceeds would be used to create a "central bank" that OSU would use to give loans to various units to make capital improvements, with the units repaying the bank at a rate above "weighted average cost of capital," according to Fitch Ratings.
"Fitch recognizes that OSU's increasing use of less traditional bond structures, including bullets and century bonds, adds an element of risk; however, its significant unencumbered reserves, strong market access and experienced financial management team help to mitigate concern associated with this more aggressive debt profile," Fitch analyst Joanne Ferrigan wrote in the ratings report.
Ferrigan also noted that the university set up an endowment fund dedicated to raising money to pay off the 2011 century bond at maturity.
Like the other ratings firms, Moody's Investors Service said fiscal discipline is key to the ability to offset risk tied to century bonds.
"While debt is not amortized as rapidly as it was historically, the university continues to build its reserves on an annual basis to pay debt service, when due," Moody's said. "As of June 30, 2013, these reserves amounted to $144 million. This disciplined approach to debt management mitigates the practice of structuring debt with delayed principal payments. Any move away from this practice would be a credit negative."
University officials said at the August board meeting that they are considering covenants that would ensure that conservative debt policies could not be overturned by future boards.
The borrowing will be the last new-money deal under a $2 billion capital plan launched in 2010 and set to end in 2015.
The largest piece of the plan, $1.1 billion, raised money for the Ohio State University Medical Center, which is expected to open in December.
The capital plan also financed student housing as part of a new policy that requires all first and second-year students to live on campus.
The Ohio State University Health System generates nearly half of the university's revenues - making up 47% of 2013 revenues, according to ratings analysts. That brings some risk to the school, as the health system operates in a competitive environment and faces a shifting health care landscape, like all providers, due to the new federal health care law.
The university health system operates 1,200 beds and "serves as a major tertiary and quaternary referral center for Ohio and the Midwest," Moody's said.
"OSU benefits from a diverse stream of revenues," Moody's said. "However, as patient care revenue has climbed to 47.4% of total fiscal year 2013 revenues, the benefit of this diversity is weakening."
But the health system's performance has been consistently strong and cash flow for fiscal 2014 is expected to be strong, Moody's said.
