University of California pricing $854 million into receptive market

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LOS ANGELES — Controversy over the University of California president’s budget is not expected to hamper a bond sale this week, according to one investor.

On Tuesday, Barclays Capital plans to price the Regents of the University of California’s $854 million of Series 2017M tax-exempt and Series 2017N taxable limited project revenue bonds.

UC had $30 billion of revenue in fiscal 2016, according to a Moody's Investors Service report, making it the largest public university system in the U.S. in terms of revenue. It has 10 campuses, six medical schools and five academic medical centers spread throughout the state, and had nearly 250,000 students enrolled in fiscal 2016.

“Despite the more limited security pledge that UC is offering, we would not expect them to pay much above what their general revenue debt would price at – they will get a strong bid,” said Tom Schuette, a partner and co-head of the Investment Research & Strategy department at Gurtin Municipal Bond Management.

“The budget headlines from earlier this year should not impact this sale,” Schuette said.

An April 25th critique of financial and administrative practices at the University of California’s Office of the President spurred legislation to impose more oversight over the university system's budgetary practices.

The market viewed the budget mess as short-term political noise between the UC administration and the legislature, Schuette said.

“UC’s credit strengths are so strong and structural in nature, that they more than off-set any short term concerns about a particular budget cycle,” he said.

In addition to the underwriting syndicate led by Barclays, the finance team also includes Swap Financial Group as financial advisor and Orrick, Herrington & Sutcliffe as bond counsel.

The bonds are rated Aa3 by Moody’s and AA-minus by both S&P Global Rating and Fitch Ratings. All assign stable outlooks.

Limited project revenue bonds are secured by the gross revenues generated by the projects financed by them.

The proceeds will be used to finance and refinance the acquisition, construction, improvement and renovation of UC facilities.

The money will fund 140 projects across the UC system’s 10 campuses, and include student housing, faculty housing, athletic facilities, recreational, parking facilities, dining/food services facilities and other leased facilities, according to the preliminary offering statement.

In addition to the university system’s own credit strength, it also benefits from the current economic strength of the state.

“There is not a lot of nuance in California in paper right now – if you are a high-quality obligor, you will price extremely well given market demand,” Schuette said.

UC's $1 billion May tax-exempt deal priced extremely well with many maturities pricing through the scale, and the 10-year coming in at plus six – so it did not appear to pay any material penalty, Schuette said.

“At this point, the lack of nuance is not necessarily hurting investors on sales like this given that we do not believe UC carries much credit risk,” Schuette said. “However, the lack of nuance is worth remembering on sales where investors’ demand is leading to actual credit risk being priced out.”

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