California State University, the largest university system in the country, will market about $244 million of refunding bonds this week to refinance debt issued in 2005.

Bank of America Merrill Lynch will price the deal, with a two-day retail period starting on Monday and institutional pricing on Wednesday.

Robert Eaton, senior director of financing and treasury at the university, said the bonds are being refinanced to reduce interest costs, but did not give an estimate of how much the system expects to achieve in savings.

"At this point, I would prefer not to provide estimated figures, since there continues to be significant changes in the level of potential savings due to the volatility in the financial markets," Eaton said. "We will continue to monitor our portfolio in light of movements in interest rates and make final decisions affecting the level of savings as we go into pricing."

The bonds being refinanced were originally used for a variety of projects across the CSU system, such as housing, parking, and student unions.

The deal will be structured with serial bonds with maturities ranging from 2014 through 2024. A broad pool of revenues, including student housing fees, student union fees, and parking, student center, and continuing education revenues secure the systemwide revenue bonds.

The university system, with 23 campus and almost 437,000 students, was upgraded by Standard & Poor's before the sale to AA-minus from A-plus. The outlook is stable.

"The upgrade reflects the historical improvement in operating performance, primarily due to its strong management team with good fiscal planning and policies in place," said Standard & Poor's credit analyst Bianca Gaytan-Burrell. "Although fiscal 2012 was negative on a full-accrual basis, mostly due to a midyear state appropriation reduction, we believe the system was able to prudently manage through such constraints within the budget and maintain sufficient operating liquidity in the event of any cash flow volatility at the state level."

Standard & Poor's said that as the state funding environment stabilizes, it should help the university stabilize enrollment and improve financial resources in the long run.

Moody's Investors Service assigned a Aa2 rating and stable outlook to the university's bonds and affirmed the rating on its outstanding systemwide revenue bonds. The system's $4.7 billion of debt includes this Wednesday's offering and its commercial paper. There are approximately $3.6 billion of outstanding systemwide revenue bonds.

The rating reflects CSU's strong market position and student demand as the nation's largest four-year higher education system, Moody's said. Analysts also noted its "ample unrestricted balance sheet liquidity and its ability to weather substantial state funding reductions through significant tuition increases and launching expense management initiatives."

Moody's said an upgrade is currently unlikely in the near to medium term, given the state's A1 general obligation rating. The university relies on state appropriations for operating support and balance sheet leverage.

A weakened student market position, liquidity decline, funding cuts or payment deferrals, or downgrade of California's GO rating could put downward pressure on the university's rating, analysts said.

The system last issued systemwide revenue bonds in August last year. Yields on the $453 million deal ranged from 0.24% in 2013 to 3.54% in 2032, 3.29% in 2037, and 3.85% and 3.35% in a split 2042 maturity.

KNN Public Finance is the financial advisor on Wednesday's deal. Orrick, Herrington & Sutcliffe LLP is bond counsel.

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