DALLAS – Three public university systems in Texas are charging into 2017 by selling $1.5 billion of revenue bonds.
The Texas A&M, Texas State and North Texas systems have experienced strong growth and stronger state support than those in nearby states, according to ratings analysts. State support could suffer in the 2017 Legislature as lawmakers deal with falling revenue amid prolonged weakness in the energy markets.
"Statewide, higher ed institutions have been asked to determine the effect of a 4% cut in special formula funding items," Moody's analyst Mary Kay Cooney wrote in a rating report. "While this is a very small component of the system's overall state funding, at roughly $1.3 million for each of fiscal years 2018 and 2019, more material funding cuts would pose a challenge given increasing leverage."
Across Texas' 11 college and university systems, outstanding debt totaled nearly $12.9 billion at the end of fiscal year 2016 on Aug. 31, according to the Texas Bond Review Board. That was about 10% higher than the $11.7 billion outstanding at the end of fiscal year 2015.
The heavy issuance expected in 2017 derives from $3.1 billion of tuition revenue bonds authorized by the 2015 Texas Legislature. As of Aug. 31, state universities had yet to issue $2.36 billion of the authorized bonds.
Texas A&M University System, the largest and highest-rated of the three systems going to market this month, is planning to issue up to $526 million of revenue finance system bonds Jan. 9.
The bonds are expected to be issued as taxable Series A and tax-exempt Series B, with final maturities on both in 2036. The bonds are rated triple-A by Moody's, S&P Global Ratings and Fitch Ratings.
"We assessed the Board of Regents of the Texas A&M University System's enterprise profile as extremely strong, characterized by growing enrollment, good student quality, robust demand metrics, and an excellent management team," S&P analyst Luke Gildner wrote.
Moody's analyst Susan Shaffer cautioned that TAMUS' debt portfolio has "increased substantially" in recent years, with pro forma debt increasing 86% since fiscal 2012.
"The system's planned growth of debt at a high level and continued rapid pace could pressure the university's rating or outlook if not matched with commensurate revenue and resource growth," she added.
Moody's rates $3.6 billion of TAMUS' outstanding debt.
The January deal will provide about $387 million of new money for tuition revenue bond projects authorized by the 2015 Legislature. The remainder of the issue will advance refund higher-interest bonds.
With its main campus in College Station 95 miles northwest of Houston, TAMUS includes 11 individual institutions and seven research and service agencies across Texas. In fiscal year 2016, the system had $4.3 billion in operating revenue and enrolled more than 120,000 students.
Texas State University System, headquartered in Austin and with its main campus in nearby San Marcos, is expected to go to market Thursday with $571 million of tax-exempt Series A revenue bonds, and $31 million of Series B taxable bonds.
The Series A bonds reach final maturity in 2042 while the Series B matures in 2036.
Barclays is book runner on the tax-exempt bonds with managing director John Daniel as lead banker. Piper Jaffray, led by senior vice president Kim Edwards, is book runner on the taxable issue.
Mary Williams, managing director at First Southwest Co., is financial advisor.
The Texas State bonds are rated Aa2 by Moody's and AA by Fitch. Outlooks are stable.
Created in 1911, TSUS is the oldest university system in Texas. Eight member institutions are showing uneven growth, analysts say, with declines at some of the smaller campuses, offset by strong growth in San Marcos.
Enrollment across the system has increased by an average of 2% annually since fall 2012 to a total of 83,869 in fall 2016. Texas State University, Sam Houston State University, and Lamar University are the largest member institutions.
"TSUS has the resources and financial flexibility to manage through moderate volatility in state funding," Fitch analyst Tipper Austin wrote. "However, a significant decline in state support could pressure the rating."
As part of its Vision 2020 plan, the TSU system aims to grow at a rate of more than 11% to an enrollment of 91,300 headcount students by fall 2020.
"Given historically strong 14% growth in headcount over the fall 2010 to fall 2016 period, and favorable conditions for high school enrollment growth, the system has high likelihood of attaining their goal," Cooney said.
TSU System's total debt will rise by more than 50% to $1.2 billion from $801 million at the end of fiscal year 2016, according to Moody's.
"We have always attempted a conservative approach to debt so that our debt service declines from year to year," said Roland Smith, TSUS vice chancellor for finance.
The University of North Texas System, with its main campus in Denton and campuses in Dallas and Fort Worth, is also heading to market Thursday with $215 million of Series A tax-exempt revenue bonds and $165 million of Series B taxable refunding bonds. Series A reaches final maturity in 2036, while Series B matures in 2040.
JPMorgan is book runner on the tax-exempt deal, while Barclays runs the taxable issue.
Lead bankers for JPMorgan are managing director James Costello, executive director Doug Hartman, and executive director Marshall Kitain.
At Barclays, managing director John Daniel and Brian Frankel are lead bankers.
Mary Williams, managing director for First Southwest Co., is financial advisor.
The bonds are rated Aa2 by Moody's and AA by Fitch. Outlooks are stable.
All of UNT's series 2017 new money bonds are authorized as tuition revenue bonds supported by the state through operating appropriations equal to debt service. Including this week's issue, 46.5% of bonded debt is TRBs supported by the state, according to Fitch.
The upcoming bonds are earmarked for new building projects, refunding commercial paper, and advance refunding all or portions of the Series 2009A bonds.
Among the notable projects are renovations at the College of Law Building in downtown Dallas; construction and renovation of the Visual Arts Design facilities in Denton and an interdisciplinary research building at the Fort Worth Health Sciences Center.
The new college of law, which took over the old Dallas Municipal Building, has run into trouble with accreditation because of students' low scores on the Law School Admissions Test.
The UNT System is emerging from a period of "substantial transformation of its senior leadership and financial operation structure with strengthened oversight and strategic direction," according to Moody's.
After an accounting scandal over misapplication of state funds, UNT is operating under a new chief financial officer.
"UNTS has centralized oversight of the campuses, clarified Board of Regents governance responsibilities for the audit, and finance and facilities committees, bolstered internal audit functions, and incorporated an external auditor to supplement the existing state auditor review," wrote Moody's Cooney.
"Centralized budgeting oversight and campus self-sufficiency planning will continue to add stability to operating performance in the near term, particularly as it undergoes infrastructure expansion across system campuses."
With this issue, UNT's total debt will rise to $783 million from the $540 million reported at the end of fiscal year 2016.
"The system's leverage, though highly elevated by the current transaction, will remain manageable," Cooney said.
James Mauldin, UNT associate vice chancellor for Treasury, said the system has an aggressive amortization approach.
"We estimate that the system will retire approximately half of its existing long-term debt within the next 10 years," he said.
The system's current plans call for issuing approximately $240 million of additional bonds in the next five fiscal years or an average of approximately $48 million per fiscal year, he said.
