Indiana's Purdue to Sell $50M of COPs: Tax-Exempt and BABs

20090819l1l00p9t-1-082009purdue.jpg

CHICAGO - Indiana's Purdue University plans to enter the market next week with roughly $50 million of certificates of participation divided into a tax-exempt tranche and a taxable series that will be issued under the Build America Bonds program.

Proceeds from the COPs will finance a renovation of a basketball stadium on the main West Lafayette campus at the school, which is a member of the Big Ten athletic conference.

The sale will be Purdue's third and final for the year, said financial adviser John S. Vincent, president of Chicago-based John S. Vincent & Co. After the transaction, the school will have issued roughly $235 million of new-money bonds this year, the most since at least 2000, according to Thomson Reuters.

The deal is tentatively scheduled for Tuesday. Merrill Lynch & Co. is senior manager. Cabrera Capital Markets LLC and City Securities Corp. are also on the underwriting team. Ice Miller LLP is bond counsel. The $49.5 million issue is divided into $17.1 million of tax-exempt certificates and $32.4 million of taxable Build America certificates. The school plans to apply for the federal government's 35% direct-pay interest subsidy under the BAB program.

The tax-exempt certificates mature serially from 2010 through 2020. The taxable BABs mature from 2020 through 2031. All the debt carries a traditional 10-year call feature.

"We had considered BABs on earlier issues this year, but it was still very early in the process," Vincent said. "This time around we took a very close look at the impact on net interest costs, and we couldn't ignore the difference between the net interest costs on longer maturities versus conventional tax-exempt bonds."

The school expects to save around 70 basis points by issuing under the BAB program, Vincent said.

The 10-year call feature on the bonds helps address some early concerns that the interest-rate subsidy could somehow be canceled during the life of the bonds, Vincent said. Despite the federal government and Treasury officials' efforts to quell such concerns, they persist.

Cancellation of the interest-rate subsidy "was a concern that we had early on, more than we do now," he said. "We can somewhat mitigate that risk by having a 10-year call so that if something did happen, we felt that would be sufficient."

After next week's sale, Purdue will have a total of $943 million of outstanding debt, including its commercial paper program. Of that, roughly $266.4 million is in a floating-rate mode.

Moody's Investors Service rates the debt Aa1 with a stable outlook. Standard & Poor's rates the bonds AA, according to bond documents.

The COPs are secured by a pledge from the university through a lease financing structure with the Ross-Ade Foundation. The foundation, which is associated with the university, has built the football and basketball stadiums where the Purdue Boilermakers play, and has helped develop and build facilities in regional campuses. Proceeds from the COPs will be used to finance the first phase of a renovation of Mackey Arena, the school's basketball stadium.

Purdue is one of Indiana's two flagship institutions and one of seven state-supported universities. Student enrollment totaled more than 58,000 full-time equivalent students in the fall of 2008.

Moody's praised the university for its strong operating margins and debt service coverage as well as its diverse revenue sources. Student fees made up 44% of 2008 revenue, grants 17%, and state appropriations 23%. In 2008, the school reported $2.7 billion in total financial resources, of which $882 million is unrestricted.

The school's capital plans call for using up to $74 million of additional debt over the next 18 months, according to Moody's. Those capital plans could present a challenge for Purdue in the future if the school's resources do not grow to keep pace with the increased debt or if the state cuts back the state aid that helps to cover debt service, analysts warned.

For reprint and licensing requests for this article, click here.
Higher education bonds
MORE FROM BOND BUYER