DALLAS – The University of Texas System plans to tap its newly authorized tuition revenue bond authority in a $215 million sale of triple-A-rated debt next month.
The Texas Legislature approved $922 million of TRB authority for the UT System in 2015.
Lawmakers authorized more than $3 billion of TRBs for colleges and universities statewide. The 2015 bill signed by Gov. Greg Abbott provided the first state backing for campus construction bonds in nearly a decade.
The UT System Board of Regents authorized the deal under a supplemental resolution at its May 11 meeting. The bonds will be sold under the UT System's familiar, triple-A revenue financing system bonds credit.
Terry Hull, associate vice chancellor for finance, said the bonds are expected to price June 8 through negotiation with book runner Citi, led by director John Malpiede, head of Citi's Higher Education Group.
"We tentatively expect to close on July 1, but this date could change," Hull said.
Co-managers are JPMorgan, BOSC Inc., Estrada Hinojosa & Co., Loop Capital Markets and Hilltop Securities.
The UT System does not use an outside financial advisory service.
With the muni market continuing to devour low-risk debt, the gilt-edged paper is expected to go quickly.
"Similar to our prior transactions, we anticipate very strong market reception for the system's highly-rated revenue financing system bonds in large block sizes," Hull said.
Moody's Investors Service analyst Karen Kedem noted that support by the Texas government along with strong brand recognition and solid financial performance helps the UT System maintain its Aaa rating, the same as the state's general obligation rating.
"These strengths help mitigate the system's high exposure to potentially volatile healthcare revenue, significant capital needs, and the complexity of managing a very large organization with multiple business lines," Kedem wrote May 16. The outlook is stable.
About two-thirds of UT System research is health-related, with growth expected the addition of two medical schools, one in Austin, and the other in Edinburg in the Lower Rio Grande Valley.
"Increased diversification of funding sources contributes to annual growth compared to stagnation or contraction at other research intensive universities," Kedem wrote. "In fiscal year 2015, federal agencies comprised 60% of research funding, 15% from state and local governments, and 15% from private sources."
The world renowned MD Anderson Cancer Center in Houston anchors the UT health system, generating half of the system's patient care revenue. Revenue grew at an average rate of 8% during fiscal years 2013-2015. Moody's calls that similar to other academic medical centers.
"Outside of technology enhancements, clinical revenue is also susceptible to regulatory and government payer changes which can quickly change profitability," Kedem said.
In Dallas, the University of Texas Southwestern Medical Center and Texas Health Presbyterian, a component of Texas Health Resources, have recently completed an affiliation agreement. Moody's rates THR Aa2 with a stable outlook.
The strategic affiliation combines the community-based health coverage of Texas Health Resources with the high acuity care of UT Southwestern in the highly competitive Dallas market, Kedem wrote. "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 affiliation risks."
While some states are reducing support for higher education, Texas is increasing its commitment to the UT System and others.
In the fiscal year 2016-2017 biennium, state appropriations will increase 11%.
"While a relatively modest share of total revenue, 12%, healthy state funding is a distinct advantage of public universities in Texas," Kedem wrote. "State funding will continue to grow as the system uses its authorization to issue more than $900 million of Tuition Revenue Bonds and receives debt service reimbursement from the state."
The state also continues to provide funding for research initiatives and student financial aid under the two-year budget.
The system retains the authority to set tuition and fees, though some political leaders have challenged a recent tuition increase. Student generated revenue, which represents 12% of operations, increased from a combination of enrollment growth and modest price increases.
State support for the UT and Texas A&M systems is strongest in the form of the Permanent University Fund, one of the largest endowments in the nation. The PUF is managed by the University of Texas Investment Management Co., commonly referred to as UTIMCO.
UTIMCO was the first investment company created by a public university system. The investment strategy was modeled on those of investment managers for Harvard, Princeton, Stanford and Duke universities.
The PUF earns returns from state lands – primarily oil and gas producing regions -- and investments of that income. With oil and gas investments down sharply since the most recent peak in mid-2014, the PUF has seen declines in value.
In the quarter ended Feb. 29, The PUF's net asset value fell by $572 million to $16.98 billion, according to the most recent UTIMCO report.
Net investment return for the quarter was negative 3.89% versus its composite benchmark return of negative 4.39%. The decrease was attributed to a net investment return of negative $691 million.
Distributions from the PUF are designated as the Available University Fund. As a result of negative returns, no distribution was made to the AUF during the quarter.
According to a study by the Commonfund and the National Association of College and University Business Officers, endowment returns in the U.S. for fiscal 2015 declined to 2.4%.
Fitch Ratings cited the study, noting that its higher education portfolio will remain stable nonetheless.
"Ratings are typically unaffected by short periods of weaker returns because endowment funds generally have a very long investment horizon," analysts wrote in an April report. "Moreover, our outlook remains stable because endowment draw accounts for approximately 10% or less of most rated institutions' annual revenues."
Fitch on Wednesday affirmed its AAA rating on UT's revenue financing system bonds.
Severe investment losses or extended periods of poor returns could weaken the operating performance of institutions that are heavily dependent on investment earnings to support operations, analysts said. University endowments, including the PUF took a serious hit in the 2008 recession.
"This could put pressure on ratings, especially if endowment spending rates become unsustainable," Fitch said.
