CHICAGO — The University of Cincinnati is poised to become the first public university to jump on the green bond bandwagon next week when it comes to market with $29.5 million of the increasingly popular debt.
The deal also features $54.5 million of new-money and refunding bonds for a total issue size of $84 million.
The debt is rated Aa3 by Moody's Investors Service and AA-minus by Standard & Poor's.
The university opted for the green bonds after it put out a Request for Proposals for underwriters earlier this year and several banks suggested green bonds in their responses, said Lynne Johns, executive director of debt management for the university.
Underwriters are increasing the marketing of so-called green bonds, which finance environmentally friendly projects, to win a piece of the growing market. At least six municipal issuers have brought green deals to market since the first muni green bond deal in 2013, a $100 million issuance for Massachusetts.
In the higher education sector, the University of Cincinnati's sale will mark the second green bond deal, and the first from a public university. The private Massachusetts Institute of Technology in September sold $370 million of taxable green bonds. Another deal from a public university, possibly also from Massachusetts, is on tap to sell green bonds in December as well, according to people familiar with the deal.
Issuance of green bonds so far totals $54 billion, according to Bloomberg.
"This is certainly one of the new hot topics, this and century bonds, that people are starting to take a look at," said Bethany Pugh, managing director at Public Financial Management Inc., the university's financial advisor on the deal. "The recognition of green bonds as an option is definitely increasing."
The University of Cincinnati already has a reputation as an environmentally friendly institution, and has won several awards for its sustainability projects, according to preliminary bond documents. Since 2004, the university has completed seven projects that won Leadership in Energy and Environmental Design, or LEED, certifications from the U.S. Green Building Council.
Proceeds from the $29.5 million deal will finance a renovation of a 450-bed residence hall that is also expected to win LEED certification, according to Johns. The project is modeled after a similar 2011 renovation of the building's "sister" structure, Morgens Hall, which won a LEEDs silver certification. Altogether the school has seven buildings with the prestigious LEED certification.
The university floated $35 million of bonds in 2008 and 2010 for the Morgens Hall project.
"We didn't know about green bonds back then," Johns said. "When we looked at it now, we knew this would be a great project to issue green bonds for."
The main benefit to green bonds on the market side is attracting a new and diverse investor base that's interested in buying debt that's considered environmentally friendly. Johns said the finance team doesn't expect to see significant interest rate savings as a result of issuing green bonds.
Connecticut, which last week became the latest green-bond issuer with a $60 million issue for clean water projects, said its total interest cost on the bonds was 3.56%. The debt matures starting in 2028 through 2031, according to the state.
"The benefits of the green bonds are having new investors and being able to then promote our sustainability program further," Johns said. "We are doing this with the university being centered around a sustainability program, and now we're financing the structure with a green bond, so it's to further promote our best practices for sustainability."
Pugh said broadening the investor base for an issuer with more than $1 billion of debt is "a really smart thing to be doing."
"The hope is that we do have a broader pool of investors not just for this sale but potentially for future sales to diversify the base and get the opportunity to potentially realize economic savings by having a broader investor base," Pugh said. "These bonds are obviously well aligned with the university's broader mission of enhancing sustainability."
The sale is set for Dec. 2.
The team will hold one order period for retail and institutional investors, with retail investors getting priority, Pugh said. The issue includes $29.5 million of the green bonds and $54.5 million of refunding and new money bonds. Proceeds from the new-money piece of the Series D bonds will be used to finance renovation of the Medical Sciences Building, as well as advance refund bonds originally issued in 2007.
The school expects to see a net present value savings of 7.5%, or $3.7 million, over the life of the bonds through the refinancing, according to Johns.
Peck, Shaffer & Williams, a division of Dinsmore & Shohl LLP, is bond counsel. Wells Fargo Securities is senior underwriter, with JP Morgan, Keybanc Capital Markets Inc. and Loop Capital Markets also on the team. Public Financial Management Inc. is the financial advisor.
The university typically sells bonds or notes twice a year, according to Johns. It has no formal capital program - a $1 billion campaign ended in 2013 -- but borrows to finance projects as they come up. Next week's deal marks its first negotiated sale of the year, and it plans to float only $30 million through 2015.
The university has $1.2 billion of outstanding debt.
The bonds carry a pledge of general receipts, which excludes all revenues except state appropriations and restricted donations. Pledge revenues totaled $653 million in 2014, according to bond documents.
Ratings agencies praise the school for its national reputation and role as a large research university in Ohio. Student enrollment totaled 43,600 as of fall 2014, the highest in the school's 200-year history. The decision to renovate of the new residence hall, which has been unused since 2008, was driven in part by rising student demand for on-campus housing, according to the university.
"Strong fiscal oversight, solid student demand, and good fundraising have driven strong cash flow," said Moody's, which rates the debt Aa3. But analysts warned that the strengths are offset by high amount of debt, pressured state funding and a competitive market for students.
The university has "very high pro forma" maximum annual debt service that will total 10.4% in 2018 as a percentage of 2014 operating expenses, noted Standard & Poor's, which rates the debt AA-minus.
Other challenges include exposure to state appropriation cuts, slim financial resources ratios and risks associated with the UC College of Medicine and cuts from the new federal health care law, analysts said.
"The stable outlook reflects our anticipation that UC's enrollment and student demand will remain steady during our two-year outlook period," S&P said in its ratings report. "We also anticipate that the financial resources ratios, which we consider slim for the rating category, will continue to gradually improve, that overall budget assumptions will stay conservative and achievable, and that the debt burden will gradually moderate relative to the budget."
