University of Houston Brings Taxable, Tax-Exempt Bonds

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DALLAS – The University of Houston System will come to market with revenue bonds authorized by the Texas Legislature in a $283 million deal that includes taxable and tax-exempt debt.

The $101 million 2016A tax-exempt and $182 million Series 2016B taxable bonds approved by the University of Houston Board of Regents in November will price competitively Jan. 21 with First Southwest as financial advisor, University of Houston treasurer Raymond Bartlett said.

"We expect them to be well received," he said.

About 70% of the deal is new money and the remainder for refunding. UHS expects net present value savings of about $5.1 million or 10.6% on the refunding of 2008 bonds, according to Jim McShan, interim vice chancellor for finance.

The bonds carry ratings of AA from Standard & Poor's and Aa2 from Moody's Investors Service with stable outlooks.

"The stable outlook incorporates expectations of continued positive operating performance and a steady market position in the economically vibrant Houston metropolitan area," Moody's analyst Mary Cooney wrote. "While leverage will increase, it will be partially offset by state debt service reimbursement."

The debt is secured by a broad pledge of revenues, including tuition, fees, and other funds. Pledged revenues in fiscal 2015 totaled $1 billion, providing 11 times coverage of pro forma maximum annual debt service, according to Moody's.

The legislature recently approved $362 million of tuition revenue bonds for UHS, for which the state is expected to annually appropriate debt service beginning in fiscal year 2017. Lawmakers also increased the annual Higher Education Assistance Fund capital appropriation, by nearly 50%, from $51 million in FY 2016 to $76 million for 2017-20.

New money from the issue will include $63 million for construction of a health and biomedical sciences center on the main campus and $54 million for a new academic building in Sugar Land.

The Clear Lake campus will get $25 million for construction of a health sciences and classroom building in Pearland and $54 million for construction of a science, math and engineering classroom building.

The UH downtown campus will get $60 million for construction of a science and technology building, while the Victoria campus will get $60 million for academic expansion and land acquisition.

Another $47 million will go toward land acquisition for construction of a campus in the Katy area.

"In addition to constructing a state-of-the-art facility, we will continue to bring programs that meet the specific educational needs of the businesses and residents who are fueling the growth of this area," Jason Smith, UH System vice chancellor for governmental and community relations, said in a statement.

With 53,000 students on all of its campuses, UHS is seeing strong growth.

The system manages its own self-liquidity to support a $125 million commercial paper program. As of Sept. 30, about $66 million of commercial paper was outstanding, a portion of which will be refunded with the current issue. The system relies on the CP program for interim financing, refinancing with revenue bonds from time to time.

The system's discounted daily liquidity of $389 million is primarily comprised of money market funds and US Treasuries, according to Moody's. Discounted daily assets covered demand debt twice over without the largest money market fund.

"Improved operating performance in FY 2015 reflects positive outcomes in the system's strategic plan for investing in student success, strong growth in net tuition revenue growth and state support, as well as benefits of conservative budgeting," according to Moody's.

The system's FY 2015 total operating revenue of $1.2 billion was up 9% over FY 2013 and was diversified among student charges, state appropriations, and grants and contracts, Moody's noted.

"The system will continue to significantly benefit from robust state support for operations and capital," Cooney said.

Started in 1927 as a junior college under the auspices of the Houston Independent School District, the University of Houston evolved into a four-year college authorized in 1947 by the Texas Legislature.

Tuition revenue bonds approved by the legislature constitute about 17% or $142.7 million of UHS total outstanding long-term debt.

"We believe UHS enrollment is likely to continue to increase over the next two years while its financial performance should remain strong," S&P analyst Ken Rodgers said. "However, we do not believe there will be a significant increase in its financial resources over this period as UHS continues to fund a lot of its capital development from its own resources and may issue additional debt of $323.5 million, most of which is expected to be state supported TRB's."

The university reports that as of its fiscal year ended on Aug. 31, 2015, its parity debt obligations totaled $833.8 million.

The UHS tuition revenue bonds were included in a $3.1 billion authorization by the Texas Legislature in the 2015 session. The bonds were the first such revenue bonds authorized in more than nine years.

Higher education officials told lawmakers the bonds were needed for construction needs, especially at smaller regional campuses that can't rely as much on major donor support.

House Bill 100 authorized $927.6 million for the University of Texas System. The Texas A&M University System is authorized to issue $805.8 million. The systems governing the University of Houston, Texas State University, the University of North Texas and Texas Tech University would be able to issue at least $250 million each.

Opponents of debt argued that the campus construction should be funded through cash on hand, saving on interest cost. But other lawmakers said that using the general fund or rainy day fund would count toward the state's constitutional spending cap, reducing appropriations for other programs.

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