Kenyon College Refunds $102M To Switch VR Debt to Fixed Rate

CHICAGO — Ohio’s Kenyon College will enter the market today with $102.4 million of refunding bonds to refinance all of its variable-rate debt into fixed-rate mode.

The transaction will refund three variable-rate demand bond issues totaling $57.6 million, restructure $29.5 million of medium-term notes into long-term debt, and provide roughly $10 million in capitalized interest.

At the same time, the school is expected to enter into a reverse swap with its current floating-to-fixed rate swap counterparty in a move that will allow it to avoid having to make a large, up-front termination payment.

After the deal, Kenyon’s debt portfolio, which totals roughly $191 million, will all be in a fixed-rate mode, a big shift from the 32% that was variable rate in fiscal 2009.

“We wanted to take the bank risk off the books,” said Joseph Nelson, Kenyon’s vice president for finance. “We’re not certain whether banks will continue to offer credit enhancement and what they’ll charge for it.”

The Ohio Higher Educational Facility Commission will act as conduit issuer. Bank of America Merrill Lynch is the underwriter.

Nelson said the finance team would wait until today before making a final decision, but is likely to opt to enter into a reverse swap with current counterparty Royal Bank of Canada rather than terminate the existing swap.

Under the current swap, Kenyon pays a fixed rate of 3.5% and receives a floating rate equal to 68% of the one-month London Interbank Offered Rate. Under the reverse swap, the college would pay 68% of Libor for a yet-to-be-determined fixed-rate amount.

The termination payment is currently around $5 million, according to Nelson. “It’s so curve-sensitive,” he said. “As recently as 10 days ago it was $4 million and two weeks ago it was $7.5 million.”

The move will allow the school to stem losses on the swap as well as spread out its payments over a longer time.

“We are out of the money on [the swap]. We’re just fixing that so it won’t move anymore and we can be done with it,” Nelson said. “Financing it over a long period of time makes more sense than writing a check up front.”

After today’s refunding, 21% of the college’s debt, or $40.5 million, will be medium-term notes that mature in $12.5 million to $15 million increments through 2016, according to Moody’s Investors Service. The “somewhat aggressive” structure could present a challenge for the school and will require “ongoing oversight and management,” analysts warned.

But overall the school’s liquidity levels would be sufficient to cover any mandatory tenders in 2014 — the next scheduled maturity date for the notes, when $13 million will mature — if the remarketing fails, analysts added.

Moody’s rated the debt A1 with a stable outlook, citing Kenyon’s consistent operating surpluses and national reputation as a small liberal arts college — it draws only 16% of its students from Ohio. Its per-student tuition totaled $26,378 in fiscal 2009, and its annual fundraising remains healthy. Challenges include a balance sheet that is relatively leveraged for an A-rated college and some limited budget flexibility in the near term, said Moody’s.

Kenyon does not expect to enter the market with new-money bonds for the next few years, Nelson said.

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