CHICAGO — Indiana’s Purdue University, one of the nation’s few higher education institutions with a triple-A rating, will price $45 million of refunding student facility system revenue bonds Tuesday.
The move will shift about half of the school’s outstanding variable-rate debt into a fixed-rate mode.
“We’re doing this not to lock in savings per se, but we’re doing it to lock in certainty and create capacity down the road,” said John Vincent of Chicago-based John S. Vincent & Co., Purdue’s financial adviser.
Officials expect to secure an interest rate of around 3% on the bonds, which mature over the next 13 years, locking in predictable debt-service payments over the life of the debt.
The refunding will also free up space for Purdue to issue variable-rate debt in the future without taking on too much exposure in its overall portfolio, Vincent said.
“The university expects that down the road, interest rates will rise again, and by refunding the variable-rate bonds today, we will have the capacity to do it down the road when it’s more valuable to us,” he said.
Bank of America Merrill Lynch is senior manager on the offering, with City Securities Corp. and Loop Capital Markets rounding out the underwriting team. Ice Miller LLP is bond counsel. The Purdue University Trustees is the issuer.
The debt is secured by a first-lien pledge on net income of Purdue’s facilities system, which includes all residence halls and dining facilities, and by other available funds, excluding state appropriation and student fees.
Purdue has $1.1 billion of outstanding bonds, including commercial paper and certificates of participation. Of that, about $90 million will be in a variable-rate mode after this week’s sale.
All of the school’s variable-rate debt is unhedged and supported with self-liquidity. Purdue’s self-liquidity program is ample enough to cover potential tenders on the variable-rate bonds, according to credit analysts.
The university plans to issue more than $90 million of new-money debt through 2012, with some of the borrowing slated for later this year.
Purdue is expected to be able to absorb the additional debt without too much pressure given its overall strong fiscal position, analysts said.
The university enjoys a coveted Aaa rating from Moody’s Investors Service. Standard & Poor’s boosted its rating to AA-plus from AA in November.
Credit strengths include a strong market position as one of Indiana’s two flagship state universities and membership in the Big Ten athletic conference.
Purdue’s operating margins have been consistently positive, with a 5.7% three-year average operating margin, according to Moody’s.