DALLAS – The University of Texas System will give investors a choice of top-rated taxable or tax-exempt bonds in a $241 million bond sale this week.
Backed by the Permanent University Fund, the bonds carry triple-A ratings from three agencies.
Terry Hull, associate vice chancellor for finance at the UT System, said the pricing is likely Dec. 1 through negotiation with a syndicate led by Wells Fargo managing director Laura Powell.
"We expect a very strong investor response as PUF bonds represent one of the strongest credits available in the market," Hull told The Bond Buyer.
After the Thanksgiving weekend, volume in the primary market is rebounding to $6.72 billion after $388.3 million in the holiday-shortened week. The University of Michigan is also selling $312 million of triple-A rated bonds on Dec. 2.
This week's UT deal is the second PUF issue of the year. In July, the system priced $218 million of the bonds.
Coming in two series, this week's bonds will refund commercial paper with fixed-rate debt.
The taxable bonds maturing in 2045 will be issued as 2015-C bonds in the amount of $126 million.
Co-managers on the taxable series are Goldman Sachs & Co., Loop Capital Markets and Raymond James. The UT System plans to close on that deal in December.
The tax-exempt bonds in the amount of $115.9 million are co-managed by BOSC Inc., First Southwest, George K. Baum & Co. and Loop Capital Markets. Closing on the tax-exempt series is scheduled for January, making them 2016-A bonds that mature serially from 2017 through 2035.
The $17.6 billion PUF provides widely recognized security to bonds issued by the UT and Texas A&M systems. Debt service on the $2.2 billion of outstanding bonds is covered by annual allotments from the PUF, but the entire PUF is pledged.
For the fiscal year ended Aug. 31, PUF investments grew a modest 0.72% compared to 16.9% growth the previous year, according to the preliminary official statement.
One factor in 2015 was a nearly 29% decrease in mineral income – chiefly oil and gas revenue – from PUF land. PUF lands consist of more than 2.1 million acres in 19 counties, primarily in West Texas.
Annual allotments from the PUF known as "Available University Fund" decreased by nearly 13% or $113.8 million in fiscal year 2015, according to the POS. Distributions in the previous year were $877.4 million.
The University of Texas Investment Management Company oversees the long-term investments for the UT system and PUF, reporting to the UT Board of Regents.
Constitutional borrowing limits also add to investor comfort with PUF bonds, analysts noted.
"The stable outlook on the long-term PUF bond rating reflects our expectation that, during the next two years, the system will maintain solid PUF debt service coverage, and that if the system issues additional PUF debt, it will be below the state constitutional limit," Standard & Poor's analyst Bianca Gaytan-Burrell wrote.
While Fitch Ratings analysts said the AAA rating "could be pressured by a decline in the market value of PUF investments and/or issuance that bring the amount of outstanding PUF debt close to constitutional limits," they consider the scenario "unlikely at this time."
The value of the PUF has grown more than 35% from its June 30, 2011 value of $12.8 billion. Like all investments, the PUF took a hit from the recent recession, prompting a political dustup over bonuses paid to University of Texas Investment Management Company executives.
With Texas enjoying a surging economy through 2014, few complaints have been heard about the PUF management lately.
The UT System has also enjoyed robust growth, despite declining support from state revenues.
With more than 221,000 students at its eight universities and six medical schools, the UT system is consolidating campuses in far south Texas under the name UT Rio Grande Valley and is building the region's first medical school in Edinburg. UT is also adding a medical school in its headquarters city of Austin. The UT medical system serves more than 2.6 million patients annually.
"Total enrollment continues to increase, but growth is not evenly distributed across the system due to capacity constraints, guaranteed admission to the top ten percent of resident undergraduate students, and the strengthening of admissions standards at particular campuses," wrote Moody's Investors Service analyst Karen Kedem.
The UT System's medical facilities add complexities to the ratings, analysts said. Among the challenges facing the system are "substantial exposure to the healthcare sector," representing 41% of operating revenues, according to Kedem.
In October, the UT System announced plans to explore an affiliation between the University of Texas Southwestern Medical Center and Texas Health Presbyterian, a component of Texas Health Resources. The proposed joint venture would combine the community-based health coverage of Texas Health Resources with the high acuity care of UT Southwestern in the highly competitive Dallas market.
"Texas Health Presbyterian's solid brand and good financial performance mitigate some of the financial risk of a joint venture," Kedem wrote. "However, there are operating and cultural challenges to joining a component of a faith-based system with a component of a large public university system. System and Medical Center management have to date proven adept at managing through an evolving health care environment, and we expect will take appropriate steps to mitigate and manage associated joint venture risks."
Other major medical facilities include MD Anderson Cancer Center in Houston, UT Medical Branch in Galveston and UT Health Sciences Center at Tyler. All have relatively high exposure to Medicare and Medicaid, analysts said.
"Although health care operations provide business line diversity and credit strength for UT, they are also susceptible to regulatory and government payor changes which can quickly change profitability," Kedem wrote.
In addition to the PUF bonds, the UT system and other state universities in Texas are looking forward to issuing more than $3 billion of tuition revenue bonds authorized this year by the Legislature.
The UT system will not issue any TRBs until mid-to-late 2016, Hull said.
"State appropriations to reimburse TRB debt service do not begin until Sept. 1, 2016," he said.
