LOS ANGELES — ArtCenter College of Design, a Pasadena, California, university, plans to price a $100 million combined refunding and new money deal next week.
The university is experiencing significant enrollment growth at a time when universities are struggling.
“They have grown up to 2000 full-time equivalent” enrollment, said Doug Brown, director of public finance for Wells Fargo. The university received a Baa1 bond rating with a stable outlook from Moody’s Investors Service ahead of the sale.
The rating “reflects its growing enrollment and net tuition revenue per student supporting rising revenues,” Moody’s wrote. “The stable outlook incorporates our expectation of ongoing positive trends in enrollment growth and related revenues, as well as financial outcomes that continue to be in line with fiscal 2017.”
The bond sale will refinance $61M in variable-rate bank debt into fixed-rate and provide $42 million in new money to do extensive renovations on two 1970s era buildings on the private university’s south campus.
Wells Fargo is the lead manager for the bonds, which are being issued through the California Educational Facilities Authority, a state treasurer’s conduit issuer. Squire Patton Boggs LLP is bond counsel. The university doesn’t have a financial adviser.
Wells Fargo is also the lead broker-dealer on a $40.5 million deal being sold through CEFA next week for Mount Saint Mary’s University in Los Angeles. Those bonds received an A rating from S&P Global.
Brown, who’s focus at Wells Fargo is on higher education and non-profit clients, said he expects “there will be more higher ed transactions this year in California and nationally.”
Brown wouldn’t comment on how many basis points of lift ArtCenter and St. Mary’s might get from being a California credit when demand is high for the state’s bonds, though he said a deal for the California Academy of Sciences that Wells Fargo was the lead manager on last week priced tighter than expected. The California lift was probably a factor in demand for those bonds, he said.
“Everything in California has been trading and pricing aggressively,” Brown said.
The ArtCenter bonds will price “as a university credit, but benefit from being in California,” he said.
The bonds are expected to see a lot of institutional interest from California-specific bond funds, and will probably see some interest from retail and middle market investors as well, he said. Separate institutional and retail sales days are not planned, however, for the bonds pricing Aug. 7.
Brown expects both universities to compete well for investor interest, even given a heavy bond calendar in anticipation of June, July and August money coming into the market from coupons and prior payment bonds.
“I feel good about the calendar, but we certainly looked at what other deals are coming to market,” he said.
ArtCenter didn't set a target interest rate, because the bonds would be trading out of the direct bank loan, variable-rate structure, Brown said. “On the new money, they are pleased with where the market is, so they don’t have a target rate.”
The refunding will eliminate the liquidity covenant required on the bank loan and reduce coverage to 1.10 times debt service, which is lower than the bank loan covenant, he said.