SAN FRANCISCO - Biola University in Southern California is preparing to go to market next month with a fixed-rate bond issue that will take out variable-rate debt and assorted swaps that landed the school in hot water with the Internal Revenue Service and led Biola to sue its bankers and swap providers.
The Christian institution in La Mirada, Calif., plans to issue about $96 million in revenue bonds, which will refund the school's outstanding variable-rate bonds from 2002 and 2004 and fund termination costs for interest rate swaps that were used to hedge those bonds.
The university disclosed in 2006 that the IRS had made a preliminary determination that $35 million of its outstanding revenue bonds were taxable because a swap agreement did not meet qualified hedge rules.
A closing agreement was executed in October to settle the audit, said Hawkins, Delafield & Wood partner Russell Miller, who represented Biola in the matter. Further details were not available.
In August 2007, the university filed a federal lawsuit against parties involved with the 2002 and 2004 bonds and their associated hedging agreements.
The lawsuit named underwriter Banc of America Securities LLC, Bank of America NA, Bank of America Corp., BoA managing director Richard Chisholm, and BNP Paribas.
The lawsuit charged that BoA conspired with BNP Paribas to systematically overcharge Biola by marking up the prices of the swaps and covertly splitting the excessive profits.
The original lawsuit alleged fraud, racketeering, breach of implied covenants of good faith and fair dealing, breach of fiduciary duty, unfair business practices, unjust enrichment, and other misconduct.
Since then, the judge has dismissed BNP and Chisholm as defendants, and granted BoA's requests to dismiss some of the causes for action, while allowing Biola to proceed with an amended complaint against the three BoA entities on others, according to the university's attorney, Sylvia Scott of Freeman, Freeman & Smiley LLP.
"The judge has allowed us to basically go forward with our lawsuit against B of A with regard to fraud and unfair business practices," she said, adding that the suit is now in the discovery phase.
Biola has appealed the ruling dismissing the other causes for action to the U.S. Court of Appeals for the Ninth Circuit, which has yet to act, Scott said.
Moody's Investors Service Tuesday assigned a Baa1 rating to the bonds Biola plans to issue next month. It is the first Moody's rating of the institution.
Lehman Brothers will be underwriter of the fixed-rate bonds, which will be issued using the California Municipal Finance Authority as a conduit, according to the Moody's ratings report.
Biola's 2002 and 2004 bonds had been issued through the California Statewide Communities Development Authority.
In its credit report, Moody's acknowledged the ongoing litigation.
"The university is currently in litigation with Bank of America regarding the four interest rate swaps that will be terminated, with the litigation outcome unknown. However, we expect the litigation to have no impact on Biola's long-term credit profile," the report said.
Moody's assigned a stable outlook to the credit.
The rating agency cited a "solid student market position as one of the largest non-denominational Christian universities in the U.S.," with an enrollment of more than 5,200 full-time equivalent students in 2007, 14% higher than 2003.
Biola has also demonstrated consistently favorable operating performance, positive fundraising momentum, and growing financial resources because of success in growing its endowment.
Moody's also cited as a positive the university's plans to finance upcoming capital projects with fundraising, having no near-term plans for additional debt.
As challenges, Moody's noted a leveraged balance sheet, a revenue base highly reliant on student charges, and a narrow market niche as an evangelical Christian university, though demand for such education has been growing nationally.
The university, on its Internet homepage, promises a "Biblically centered education." Applicants must be an evangelical believer of the Christian faith, according to a Biola fact sheet.
Biola has been "relatively successful" at attracting students, according to Moody's, citing its 78% selectivity level, meaning it turns away 22% of applicants, and a generally stable "yield" of 52%, meaning that about half of those accepted end up enrolling.
"Management is projecting modest enrollment growth at both the undergraduate and graduate levels, which we believe Biola can achieve," the Moody's report said.
The 100-year-old university is located south of Los Angeles and draws 70% of its undergraduate body from the West Coast. More than one-quarter of its enrollment is in graduate degree programs.
"We expect that Biola will continue to experience tuition revenue growth, although not at the pace seen recently due to access and affordability concerns," the Moody's report said. "Nonetheless, we also expect modestly rising unrestricted gift revenues as the university continues to build its development activities."
