CHICAGO — With a round of positive credit action to tout, DePaul University in Chicago will enter the market this month with $165 million of debt that will include its first new-money sale to fund capital projects in more than a decade.
The Illinois Finance Authority will be the conduit issuer for the school, which is the largest Catholic university in the country, with an enrollment of more than 25,000 students.
Goldman, Sachs & Co. is the senior manager. Barclays Capital, Cabrera Capital Markets LLC, and Samuel A. Ramirez & Co. are co-managers. Chapman and Cutler LLP is bond counsel.
Ahead of the sale, Fitch Ratings upgraded DePaul’s rating to A from A-minus and assigned a stable outlook. Moody’s Investors Service affirmed its A3 and revised its outlook to positive from stable. Standard & Poor’s revised its outlook to positive from stable on the university’s A-minus rating. The actions affects $300 million of debt, including the new issue.
The university will sell $115 million of fixed-rate new-money revenue bonds on Wednesday and follow up with $50 million of refunding bonds on Jan. 27, said school treasurer Jeffrey Bethke.
The refunding will fix out through 2028 debt that was restructured three years ago with a put that expires this year. The overall amortization schedule will remain the same.
“Though the rates are very attractive, we are not comfortable with the uncertainty of the shorter-term put,” Bethke said of the finance team’s decision to go with a long-term fixed structure.
The new money will help finance projects included in the school’s “VISION twenty12” program for the university’s main campus on the city’s north side, said chief financial officer Bonnie Frankel.
Some proceeds also will go towards downtown campus projects. The university operates four smaller satellite campuses in Naperville, Oak Forest, Rolling Meadows, and northwest Chicago.
The capital program includes a new academic building, new music and theater facilities, and a new science building. “The focus is to improve academic quality,” Frankel said.
A master plan for the Lincoln Park campus was approved in the later years of the last decade and the city signed off on zoning issues in 2009. “Those construction efforts have driven our current strategic plan.”
The new-money piece represents the university’s first issuance to fund capital projects in more than 10 years. Since officials previously had focused their attention on improving operating results, shoring up the balance sheet, increasing fund raising to build its endowment, and crafting course programs to meet current student demands.
“We think we built a pretty good financial model based on income and have delivered pretty good and consistent results,” Bethke said.
The university saw operating margins of 10% to 12% in fiscal 2006 and 2007 before slipping to a still-solid 7.7% over the last two years.
The university used extra operating cash to cover deferred maintenance and capital spending, and to restructure some of its off-balance debt that funded housing projects.
Based on fiscal 2010 results, maximum debt-service coverage is at 2.7 times. Financial resources totaled $325 million.
The rating agencies recognized the university’s achievements in their latest reviews.
“The outlook change is based on the university’s very strong operating performance and limited additional debt plans,” said Standard & Poor’s analyst Susan Carlson.
Moody’s wrote: “A credit strength is the level of unrestricted financial resources, which at $276 million are nearly 85% of total resources, providing an excellent base for DePaul’s general liquidity position and its financial flexibility.”
The university’s challenges include a high reliance on student revenues with tuition and auxiliary fees representing 90% of operating revenues, a recent downward trend in the number of freshmen, and a relatively small endowment of $310 million or about $13.500 per full time student.
Frankel and Bethke said because of the high reliance on student tuition, the university places a strong focus on enrollment management that looks at strategic growth areas such as digital media. It also has bolstered its fundraising efforts in recent years as part of the capital campaign and revised its investment strategies achieving a 15.6% rate of return last year.