CHICAGO - Buoyed by healthy finances despite a slight cut in state appropriations, Indiana University will enter the market today with $75 million of double-A rated revenue bonds that will help finance its capital improvement plans.
The fixed-rate consolidated revenue bonds are being issued under a new indenture that the university established last year as one of two main credit indentures designed to streamline its debt portfolio. All of the school's nearly $900 million of outstanding debt is in fixed-rate mode, which translates into an attractively low cost of capital for the school, according to treasurer MaryFrances McCourt.
With nearly 76,000 full-time students, IU is one of the largest higher-education institutions in the nation, and enjoys a dominant market position in Indiana as well as a strong research reputation.
The finance team decided to move forward with today's transaction following last week's announcement by the Federal Reserve it would buy up to $300 billion of long-term Treasury bonds, a move that prompted a rally in the municipal bond market.
"The bump from the announcement Thursday was helpful," said Stewart Cobine, IU's managing director and assistant treasurer, capital financing.
Barclays Capital is senior manager on the deal. City Securities Corp. and Loop Capital Markets LLC are also on the underwriting team. Ice Miller LLP is bond counsel and Darla Y. Williams & Associates PC is co-bond counsel.
The bonds are expected to feature 20-year maturities, though the final structure will be determined today, according to McCourt.
"This is a pretty standard deal for us," she said. "On our last several deals the complexity has been much more, so we're hoping the markets treat us well."
After the transaction, the school will have roughly $870 million of outstanding debt.
The revenue bonds will be payable from all the school's available funds except for student fees - which are used to back debt issued under the school's other main indenture - and other previously pledged revenue, including state appropriations. IU's available fund balance was roughly $993 million as of the end of 2008, according to Moody's Investors Service.
Proceeds from today's sale will be used to finance construction of a $70 million, 837-bed housing complex on the school's Bloomington campus.
Standard & Poor's revised its rating outlook to positive from stable and affirmed its AA rating on the school's debt ahead of the deal. Moody's affirmed its Aa1 long-term rating.
In revising its outlook upward, Standard & Poor's analysts praised the university for its consistently strong financial operations, a manageable debt burden, and good fiscal planning.
Analysts from both rating agencies, however, warned the credit could be challenged by its ongoing capital needs as well as by the somewhat-weak position Indiana finds itself in amid the national and regional recession.
Indiana is faring better than most other Midwestern states, in part due to a $1 billion budget reserve. But IU remains somewhat vulnerable if the downturn worsens, as the state provides 23% of its overall operating budget and reimburses the school for around 55% of its debt service.
State legislators in 2009 moved to cut 1% of the university's operating budget, a figure that is entirely manageable for the school, McCourt said.
"It's almost an immaterial number in terms of total operating budget," she said. With regard to possible future cuts, she added that "everything we're told that could come our way is a number we can handle."
The university is still waiting to hear if it will receive federal stimulus money, which likely would finance both capital spending and research projects, McCourt said.