Biology program among beneficiaries as University of Michigan plans $150 million bond sale

DALLAS -- The University of Michigan, in exclusive territory as a top-rated higher education institution, is scheduled to price $150 million of new money bonds next week.

The bonds will sell in the week of Jan. 22 with Bank of America Merrill Lynch as senior managers. Morgan Stanley and Goldman Sachs are co-managers. Miller Canfield is bond counsel.

University of Michigan campus in Ann Arbor.

Bond proceeds will be used to fund various capital projects including the university’s new biological sciences building, patient care and research facilities and energy improvements.

The bond sale increases the university’s debt load to $2.4 billion and the debt is expected to increase to nearly $3 billion over the next 2 years, according to S&P Global Ratings. UM is rated AAA by S&P and Aaa by Moody’s Investors Service.

The university plans to issue another $50 million more in fiscal 2018, with additional debt plans during S&P's two-year outlook period. At the same time, the university also plans to pay down approximately $77 million in principal in fiscal 2018, and about $355 million from fiscal 2019-2022.

“The university's large and diversified scale of operations, combined with substantial financial reserves, provides stability to its operating model,” Moody’s said.

“While UM has substantial capital plans over the next three to five years, its debt levels will remain manageable given the multiple sources of capital funding,” Moody's wrote.

“UM has sufficient balance-sheet flexibility to absorb this debt, at the current rating, assuming the balance sheet remains stable,” S&P said.

Moody’s noted that the university's key credit challenge is a high reliance on patient care revenue that is susceptible to regulatory and government payer changes.

Patient care is now more than half of all operating revenue and plays a significant role in determining overall operating performance. Michigan Medicine, UM’s health system, accounts for over $4 billion in revenues -- more than half of the university’s consolidated revenues in fiscal 2017.

The university is expanding health care capacity through affiliation agreements. In fiscal 2017, UM closed an affiliation with Metropolitan Health Corporation as part of its ongoing strategic geographic expansion throughout Michigan. Also in 2017, Michigan Medicine signed a non-binding letter of intent with St. Joseph’s Mercy Health System regarding potential collaborations in the state, including a joint venture related to St. Joseph Mercy Chelsea.

General revenues from tuition, fees, auxiliary revenues, indirect cost recoveries, hospital gross revenue, patient service revenue, faculty group practice plan revenue, and unrestricted investment income are pledged to the bonds. The funds totaled more than $6.9 billion in fiscal 2017.

General revenues exclude state appropriations and the revenues of Metro Health although any cash payments received by the university from Metro Health or its controlled affiliates for allocated debt service on the bonds will constitute general revenues.

UM is the state's flagship among 15 public universities. It has an enrollment of more than 56,000 at its main campus in Ann Arbor and two other campuses in Dearborn and Flint.

The university has an endowment of $13 billion, according to Moody's. State operating appropriations are only 4% of the university's overall revenue.

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