Michigan State University’s solid standing with investors is likely to outweigh any distaste for the reason the school needs to borrow $500 million: to finance settlements stemming from former university doctor Larry Nassar's sexual abuse of hundreds of girls and young women.
Market participants, however, are looking for evidence that the school can adequately cover its current and potential future liabilities without further liquidity or reputational damage.
The university's trustees approved the $500 million settlement and related bond sale at a meeting Friday. A separate bond resolution, for $381 million, was also approved to support university construction projects.
“Obviously, the use of the proceeds and the reasoning behind it might be distasteful to some people,” said Howard Cure, director of municipal bond research at Evercore. “However, I believe most investors can see through that issue and rely on the relatively stable higher education fundamentals of Michigan State.”
Moody’s Investors Service anticipates that the additional bonds will cost MSU roughly $30 million annually and increase the university’s outstanding debt by 50%.
Moody's rates Michigan State Aa2, with a negative outlook, after downgrading the school in May in anticipation of a costly settlement.
The university’s debt is rated AA-plus by S&P Global Ratings, which has the school on Credit Watch with negative implications.
“It is unlikely that enough investors would shy away the bond deal because of the settlement to make a material difference in the process,” said Matt Fabian, a partner at research firm Municipal Market Analytics. “Individual investors may choose not to buy this bond because of its connection to the Nassar scandal but it is unlikely the market as a whole would make a material distinction between this and any other MSU bond.”
Fabian said any possible penalty would likely be limited to just a few basis points.
MSU’s challenge will be to prove to investors it can cover the additional leverage the debt creates. Moody’s said covering the settlement costs through debt will moderately weaken the university's credit strength. The issuance of $500 million would amount to approximately a 40% increase in MSU’s outstanding debt, which was $1.15 billion as of fiscal 2017.
“MSU will need to convince investors that this bond issuance and other available financial reserves will provide adequate resources for this liability and any future legal issues that may arise without further damaging the institutions liquidity or reputation,” Cure said.
Fabian said that any borrowing where the proceeds don't go toward facilities that could help generate more tuition revenue is a net drain on resources, but there are mitigating factors.
“If this bond issue can reduce the political friction then MSU becomes a better credit in the long term even though financial burden higher, its political risk is lower,” he said.
“The principal risk for investors in a public university is the state turns its back on the university or it makes punitive cuts in funding or requires a university to do something for political reasons,” Fabian said. “If anything, the settlement could get the university in better graces with the state because the state didn’t want to pay for the settlement itself."
The school expects to issue the bonds within 30 days after the settlement agreement is finalized, Michigan State University spokesperson Emily Guerrant said.
“We plan to execute our bond outreach in July to plan for that 30-day time period. But at this point that clock has not started yet,” Guerrant said.
The university said it was working hard with the plaintiffs to finalize a settlement as soon as is practical. Both sides would have to sign a final settlement agreement and the judge overseeing negotiations would have to approve it before the settlement is finalized.
The school said in a press release that bonding is the quickest process to establish the settlement fund with least amount of immediate impact on the school’s programs and services. The university is still in negotiations with its insurers for reimbursement based on those liability policies. MSU expects to initially pay down its bond debt with money from insurers.
Investment income, as well as other revenue from investments, could also be used to pay down the debt.
Lawsuits against the school by victims claimed that MSU neglected to act on allegations against Nassar, the earliest of which emerged as far back as 1997 and extend to his work with the U.S. gymnastics team.
More than 300 girls and women sued the university over its handling of Nassar. He was sentenced in January to between 40 and 175 years in state prison after pleading guilty to counts of criminal sexual conduct.