Gonzaga to Sell $53M for New University Center

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LOS ANGELES -- After serving Gonzaga University for nearly 60 years, the “Center of Gonzaga” building in the heart of its Spokane, Wash. campus has come down to make way for a new and improved University Center.

The old building was completely demolished in August and the site is now being prepped for construction of the new building, financed mostly with the proceeds from a bond sale scheduled for next week.

Gonzaga, through the Washington Higher Education Facilities Authority, will sell $53 million of revenue bonds, consisting of $33 million of tax-exempt bonds and $20 million of taxable bonds.

Founded in 1887, Gonzaga is a privately endowed, independent Roman Catholic and Jesuit University located on a 131-acre campus in Spokane.

The deal is tentatively scheduled to price on Monday, depending on the market, according to Chuck Murphy, vice president for finance at Gonzaga.

Bank of America Merrill Lynch is the underwriter.

The deal had been scheduled to price in an all taxable deal in July but was postponed until market conditions were more favorable, Murphy said. This time around, the deal includes a substantial tax-exempt portion.

“We felt that having some component of it as tax-exempt would allow us a greater opportunity to make sure that we’ll be able to successfully market the bonds,” Murphy said.

Because the updated deal involves tax-exempt debt, a conduit issuer was needed, and the university is selling the bonds through WHEFA, which Gonzaga had not planned to do in July.

WHEFA has frequently worked with Gonzaga on its tax-exempt financing projects.

Carol Johnson, a manager at WHEFA, said that based on analysis from their financial advisors, the estimated total avoided interest cost is approximately $12.795 million through the projected final maturity of 2043. On a present value basis, that totals around $6 million.

Springsted Incorporated is financial advisor for the authority and Prager & Co. LLC is financial advisor for the university.

Pacifica Law Group LLP is bond counsel on the deal.

“The big thing is that they’re saving money, and they’re also getting a wonderful facility for their campus and for their students,” Johnson said.

The new 167,726-square-foot building is the result of a planning process that began three or four years ago, when university officials recognized that its current facility, constructed in 1954, was outdated and no longer adequate to keep up with the existing student population.

To address these needs, the university proposed to replace the building with an updated student center.

“As it became more apparent that we were actually going to be able to do this, we started thinking about whether this was really adequate for what we needed at this point in time, and should it be more than a student center,” said Earl Martin, executive vice president of Gonzaga. “Then it evolved into the idea of a university center.”

A “university center” is a name he said they chose intentionally, because they wanted to convey the fact that it was not just a student center, but a center that would serve the entire campus.

In addition to dining services, retail spaces, and curricular spaces, the new facility is designed to include a Center for Global Engagement, a University Ministry, and a Multicultural Education Center. It will also seek to involve the broader community with its multi-purpose ballroom that can be used as dining or auditorium space, as well as its first ever “Campus Pub.”

“We really look for the opportunity to co-locate functions that span the entire operations of the institution, but have these very particular connections that go to creating a very vibrant holistic experience for our students,” Martin said.

The new John J. Hemmingson University Center, will have a lower level and three upper floors. Construction is expected to be complete in 2015.

Gonzaga’s website documents the construction progress and includes multiple renderings of the new building, as well as a virtual tour. The center was designed by Opsis Architecture of Portland, Ore., and Bernardo-Wills Architects of Spokane.

The university says the $60 million project is the largest-value construction project in Gonzaga’s history. The project has already received a $25 million donation from the building’s namesake, Hemmingson, a university trustee .

Roughly $47 million from next week’s bond sale is expected to go toward the new center, Murphy said. Approximately $5 million will go toward financing a payment to terminate a 2007 interest rate swap agreement.

The university entered a forward-start interest rate swap agreement with Bank of America in connection with a 2007 issuance of refunding bonds. The agreement is effective Oct. 1, 2014. Murphy said the university will decide sometime between now and the effective date whether to terminate the swap.

Next week’s bonds will be secured by the university’s unrestricted gross revenues, which include all money, fees and tuition, rates, rentals, and other income. They will have a final maturity of 2043 for the tax-exempt bonds, and 2032 for the taxable bonds.

Moody’s Investors Service assigned the bonds an A3 rating and stable outlook, citing the university’s favorable operating margins and cash flow and growing financial resources.

Analysts also noted the university’s stable and experienced management team, supporting strategic initiatives through thoughtful and prudent fiscal management.

“Offsetting these strengths are an increasingly competitive student market, limited financial flexibility from increased debt, and relatively low monthly liquidity to support operations,” analysts said in the credit report.

The stable outlook reflects expectations that Gonzaga will continue to generate positive operating surpluses and improvements in its market position that translate into increased net tuition revenue and strong demand metrics, Moody’s said.

Fitch Ratings gave a slightly higher A rating and stable outlook, also citing Gonzaga’s consistent operating performance and sound financial cushion.

Analysts said the university’s enrollment is pressured, but stable, and debt is moderately high, but manageable.

Gonzaga is a tuition-dependent institution, so its operating profile is highly sensitive to enrollment levels. These have remained relatively stable over the past several years, but like many other institutions, it has experienced enrollment declines in certain graduate programs, notably law.

Undergraduate headcount totals 4,896 this academic year, with 5,372 full-time equivalents, according to Fitch. This is roughly flat from the prior year, and up 3.5% and 5.7%, respectively, since fall 2009. Graduate headcount and full-time equivalents, however, fell 6% this year and are down 7% and 10%, respectively, since fall 2009.

Gonzaga has a modest list of future potential capital projects, including a multidisciplinary science facility and a performing arts center. Longer term, it may also renovate or replace older housing units.

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