Federal cuts to higher education and threats to the tax-exemption continue to fuel bond issuance, especially among elite institutions.
This week, the Massachusetts Institute of Technology tapped the taxable market, Yale sold tax-exempts and taxables, and Suffolk University offered a low investment grade deal.
After the Trump administration began revoking
Elite private universities, which largely enjoy triple-A bond ratings supported by huge endowments, have generated cash amid the federal financial threats with a slew of
Luby used
"You can look and see how the market is repricing the tax-exempt versus the taxables. It suggests that the market is less concerned about the financial risk to the schools," Luby said, "but is clearly perceiving a risk that [investors] may lose the tax exemption for some of these bonds."
MIT priced $750 million of taxables on Tuesday. The deal was rated Aaa by Moody's and AAA by S&P Global Ratings. Barclays and J.P. Morgan were lead managers, with BofA Securities, Goldman Sachs, Jefferies and Morgan Stanley as co-managers.
"It makes sense for these schools to be borrowing in the taxable market, because it gives them an open-ended freedom to use the proceeds in whatever way they deem necessary," Luby said.
The taxable market also benefits from a broader investor base accessible to a school like Harvard or MIT, Luby said; it's a global marketplace, and these schools have global brands.
"Even if there's a threat of a downgrade on these universities, they remain very high-quality and an excellent diversifier for investment-grade bond portfolios that are dominated by corporate credit risk," Luby said. "This is a type of credit that is a good diversifier for the credit risk in most IG portfolios."
Yale also priced $400 million of corporates on Tuesday. The deal was upsized from the originally planned $350 million. Yale also priced $500 million of tax-exempts Thursday through the Connecticut Health and Educational Facilities Authority.
Barclays, Goldman Sachs and J.P. Morgan were lead managers for the taxable bonds, with Day Pitney as counsel. The tax-exempt deal has the same managers, but its counsel was Hawkins. Both deals were rated Aaa by Moody's and AAA by S&P.
Much further down the rating scale, Boston-based Suffolk University priced $158 million of bonds Thursday through the Massachusetts Development Finance Agency. The deal was rated Baa3 by Moody's and BBB-minus by Fitch Ratings.
Suffolk has "high financial leverage and ongoing budget challenges," said Moody's.
Morgan Stanley was the lead manager, with the Yuba Group as municipal advisor and Troutman Pepper Locke as counsel.
The increase in higher education volume has been mostly driven by highly-rated schools, according to a report from Municipal Market Analytics in April. But the threat to the municipal bond tax exemption gives universities like Suffolk an even more dire incentive to issue bonds now, Luby said.
"A lower-rated school that could borrow tax-exempt now needs to be thinking, 'Wow, if we can't borrow this money tax-exempt, we have to compete against similarly rated corporate bond issuers,'" Luby said. "'Our debt will cost us a lot more.'"
But lower-rated schools face more risk and more impediments to borrowing, Luby said. Tax-exempt debt must fund an approved project, and not every school has those in the pipeline.
Plus, the problems facing higher education are well-known, Luby said.
"Investors, rightly so, are going to be asking, 'How is this school planning to deal with the demographic and economic challenges … in the next two, three, five, 10 academic years?" Luby said.
If investors sat out this week's deals, there are plenty more in the pipeline ahead.
Next week, the New Jersey Institute of Technology and Waltham, Massachusetts-based Brandeis University are set to price $250 million and $127 million, respectively. And the BBB-minus rated Eastern University in Pennsylvania has a $22 million deal planned for later this month.
The increased issuance from colleges and universities have been received "OK" by the market so far, Luby said. The sector is underperforming the market overall, but that's appropriate given its higher risk, he added.
