Middlebury College plans refunding to bypass bullet payments
Middlebury College is planning a summer refunding deal that will offer it debt savings while easing lingering financial challenges that were compounded by the COVID-19 pandemic.
The small New England liberal arts college is slated to issue around $96 million of tax-exempt revenue bonds through the Vermont Educational and Health Buildings Finance Agency in July or August as part of its ongoing efforts to retool its debt structure. The refunding for Series 2010 bonds callable in November would slightly reduce Middlebury’s debt service obligations for 2021 and 2022 while also eliminating a $95 million bullet maturity due in 2038.
Middlebury seeks to combat persistent operating deficits, which have prompted elevated endowment draws, through the summer borrowing, led by senior manager Goldman Sachs and co-manager Wells Fargo. Moody’s Investors Service assigned the deal a Aa3 rating and revised the outlook on the college's $228 million of outstanding debt to negative from stable, citing ongoing weak operating performance that has hindered growth of financial reserves.
Voluntary retirement and severance programs in the past two fiscal years created unexpected expenses of $4 million, according to Moody’s analyst Susan Shaffer. Before the coronavirus pandemic, she said, the school expected improved cash flow in fiscal 2020.
“The pandemic was a hit on top of some unanticipated costs they were already facing,” Shaffer said. “They got a double punch.”
Derek Hammel, Middlebury’s director of investment and treasury operations, said the college already planned to refund the 2010 debt prior to the COVID-19 outbreak, since the bonds had a looming call option. Middlebury also executed a refunding deal last year, selling $49 million of revenue bonds through the VEHBFA to refund Series 2009 bonds and replace a $59 million bullet payment due in 2038.
“During the past few years, we have been moving to a practice of fully or partially amortizing debt rather than relying on bullet maturities,” Hammel said. “Our goal is to pay down debt over time while retaining financing flexibility in future years.”
Eliminating $150 million-plus of large bullet payments from the proposed refunding and last year’s transaction will create a more manageable balance sheet even though nearly half of Middlebury's outstanding debt will still consists of backloaded principal payments, Shaffer said. The $95 million bullet maturity will be replaced by “a modest amount” of regularly amortizing debt over the medium term and $82 million of backloaded payments in 2047 to 2050.
Hammel said Middlebury will explore another refunding in 2022 of 2012 bonds callable that year, if market conditions are favorable. An advanced refunding through taxable bonds would also be considered in the near future, he said, depending on economic conditions. Tax-exempt advanced refundings were eliminateded under the Tax Cuts and Jobs Act, approved by Congress in December 2017. But there is talk of reviving them.
Middlebury, which was founded in 1800, is a liberal arts college that had a 16% acceptance rate for the fall 2019 semester. The school enrolled 3,200 full-time students last year, which included 600 in graduate programs, according to Moody’s.