DALLAS – The University of Texas System will give risk-averse investors a large helping of its triple-A credit this week in two deals worth a combined $609 million.
"We expect a mix of bond funds, insurance companies, and retail investors to participate in the deal, which will contain a variety of coupon structures depending on investor interest," said Allen Hah, assistant vice chancellor for finance at the UT System.
Finance officials are cautiously optimistic, Hah said, because rates linger near historic lows.
"Market conditions continue to be favorable for issuers as we have had successful transactions in recent months," Hah said. "Effects from Brexit appear to have stabilized, and with the Federal Reserve confirming that the federal funds rate is to remain unchanged during today's policy meeting."
The two-day transaction opens Tuesday with $350 million of revenue finance system bonds priced through negotiation with Goldman Sachs & Co. as book runner. Goldman vice president John Stevenson is lead banker.
On Wednesday, UT will offer $259.5 million of bonds backed by the Permanent University Fund. JPMorgan is book runner, led by managing director Jim Costello.
The RFS bonds are expected to reach final maturity of 2047, and the PUF bonds will likely have a final maturity of 2041, Hah said.
Proceeds of the sale will fund a variety of projects across the system of eight universities that enroll more than 221,000 students and six health institutions serving more than 2.6 million patients a year.
The UT System has two channels for issuing debt: the Revenue Finance System and the Permanent University Fund. UT has about $9.2 billion of outstanding debt from the two channels.
The RFS bonds are backed by the entire system's revenues.
PUF debt is backed by the $17.3 billion Permanent University Fund, an endowment shared with the Texas A&M University System and made up largely of invested revenue from state land.
Total PUF obligations issued by UTS are constitutionally limited to 20% of PUF book value -- excluding PUF lands -- at the time of issuance.
TAMUS's issuance is limited to 10%.
As of Aug. 31, 2015, the most recent audit date, UTS's outstanding PUF bonds and commercial paper notes totaled $2.169 billion, 74% of the constitutional limit of $2.9 billion, according to Fitch Ratings. Post issuance, outstanding PUF debt and CP are estimated at $2.615 billion, closer to the fiscal 2015 limitation.
"Fitch expects UTS to continue PUF borrowing to fund eligible capital projects on either a temporary or long-term basis," Fitch analyst Susan Carlson wrote. "The constitutional limit ensures leverage will remain moderate."
UTS expects to use the $750 million authorized commercial paper program for interim financing and then permanently finance the notes with PUF bonds.
After this deal takes out commercial paper, about $325 million of CP is expected to be outstanding, according to Fitch.
UT does not expect to issue additional PUF bonds during calendar 2016, but may issue additional PUF debt in calendar 2017, according to Carlson.
The PUF is managed by the University of Texas Investment Management Co., commonly referred to as UTIMCO, the first investment company created by a public university system.
With oil and gas investments down sharply since the most recent peak in mid-2014, the PUF's value is down.
In the quarter ended Feb. 29, The PUF's net asset value fell by $572 million to $16.98 billion, according to UTIMCO.
"The stable outlook for the PUF debt reflects our expectation of continued prudent debt and investment management, including conservative spending from the PUF," Moody's analyst Karen Kedem wrote in a report affirming the Aaa rating.
This week's bonds come a month after UT closed on $215 million of tuition revenue bonds authorized by the 2015 Texas Legislature. The $3 billion TRB authorization was the first for the state's universities in nearly a decade.
In April, UT System refunded $134 million of RFS debt for savings of about $6.5 million.
UT System's $2.1 billion annual investment in research contributes to its global standing, according to Moody's. About two-thirds of the research is health-related, with potential for growth following the addition of two new medical schools.
The first medical school in the Lower Rio Grande Valley will welcome its first class of 55 students this fall in Edinburg. In Austin, the capital city has its first medical school with the opening of the Dell Medical School complex attached to the main UT Austin campus. The Austin school's first medical students arrived in June.
Since the beginning of The University of Texas in 1883, medical education was part of the plan to build a "university of the first class." However, political maneuvering required that the medical branch be established in Galveston on the Gulf Coast.
For 125 years, proponents continued to push for medical education in Austin.
In 2008, UT Southwestern Medical Center in Dallas approved preliminary plans to locate a regional campus in Austin.
UT-Southwestern signed an affiliation agreement with the Seton Healthcare Family in Austin in 2009 to partner in providing graduate medical education.
In 2011, state Sen. Kirk Watson, a former Austin mayor, proposed building a UT Austin medical school. A year later, voters in Austin approved a local property tax to support the school. Dell is the only medical school in the country that relies so heavily on locally generated tax revenue.
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 FY 2013-2015.
"Outside of technology enhancements, clinical revenue is also susceptible to regulatory and government payer changes which can quickly change profitability," Kedem wrote.
While other states in the Southwest continue to reduce support for state universities, the UT system benefits from a very strong and supportive relationship with the Texas state government, Kedem wrote.
In the fiscal 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."
