Ratings hold steady as Big Ten trio test bond market
Ratings held steady for three Big Ten state universities as they tap the municipal bond market this month amid a pandemic that has upended public education.
The University of Michigan priced Tuesday and Ohio State University will enter the market as soon as Wednesday. Iowa State University of Iowa refunded debt last week.
Public universities, like their private counterparts, are grappling with doubts about demand as student life faces COVID-19-driven limits, revenue hits from the loss of campus and housing revenues due to the March cancellation of in-person classes, and potential investment income losses.
They are facing decisions about whether and how to resume campus life in the fall, the prospect of state budget cuts and, in some cases, have academic hospitals that are burdened by their own coronavirus-driven challenges.
The new post-pandemic risk factors appeared by the dozens in their offering documents.
University of Michigan
The Ann Arbor-based University of Michigan priced on Tuesday a new money and refunding deal that offered $850 million of taxable paper and $136 million of tax-exempts. The university carries triple-A ratings from Moody’s Investors Service and S&P Global Ratings and stable outlooks. BofA Securities and Goldman Sachs were senior managers.
COVID-19 is referenced 39 times in the offering statement including a two-and-a-half page summary of potential impact, investment income pressures, university actions, and state risks.
The university shifted to online classes the week of March 16 and ramped down non-critical laboratory research at its three campuses March 20. Summer classes are online but the university is taking steps to have students return for the fall session. It refunded $11 million for housing and dining. The university warns of potential changes in demand and an expected increase in requests for financial aid.
In April, the school halted non-essential spending, froze some hiring and pay, and cut leadership compensation and implemented voluntary furloughs and reduced hours.
The university warns of the potential for appropriation cuts given the state’s own COVID-19-driven revenue declines. The university received $373 million in fiscal 2019-2020.
Michigan Medicine, which includes the university's academic medical center, opened a special unit for COVID-19 patients and postponed elective procedures per a state mandate. Elective services began to resume per a state order May 29.
“The stable outlook reflects our expectation that during the two-year outlook period, UM will sustain a strong liquidity position relative to that of its peers, and maintain its exceptional research and student demand profile, manageable debt burden, and financial resource ratios consistent with the rating category,” said S&P analyst Jessica Wood.
Moody’s said its rating reflects a strong international brand that has driven solid revenue growth and strong philanthropic support with $15 billion of cash and investments and $9 billion in operating revenues.
A key challenge for the school is its high reliance on the academic medical center for half its revenues that adds healthcare sector risks to the balance sheet, Moody's said.
Ohio State University heads into the market this week with a $170 million refunding to reduce floating-rate exposure. Goldman Sachs is running the books. The bonds are authorized under a multi-year debt issuance program that allows the university to amend its 2016 offering statement and enter the market quickly.
The school references COVID-19 48 times in the offering statement laying out its impact on Ohio, the prospect of state funding cuts, risks to investment income, and internal cost saving actions while reporting that “the full impact of COVID-19 and scope of any adverse effect on university finances cannot be determined at this time.” The school implemented a hiring freeze on non-essential positions through June 30 and is reviewing capital spending.
Ratings were affirmed ahead of the sale.
The university has about $3 billion of debt that carries S&P's top A-1-plus short-term ratings, AA rating on general receipts bonds and AA-minus on special purpose general receipts obligations.
The credit benefits from state operating and capital support. The school's main campus in Columbus is the third largest among public universities with more than 56,000 of the system's more than 64,000 students.
Fitch affirmed the school’s AA rating. “The stable outlook reflects OSU's resiliency through Fitch's coronavirus scenarios and incorporates the effect of steps taken by management in the spring 2020 semester to suspend in-person learning and move classes online, refund certain student fees, postpone elective procedures in the health system, and initiate expense controls,” Fitch said.
The university and health system are eligible for $115 million in funding from the Coronavirus Aid, Relief and Economic Security Act signed March 27, some of which is being disbursed for student aid. OSU currently anticipates students will return to the campus for the fall semester with final decisions expected later in the summer. Health system elective procedures resumed in May.
State support accounts for under 7% of operating revenue but could be pressured in the next fiscal cycle. The funding amounted to $474 million in fiscal 2020 but the school recently took an $18.4 million.
Moody’s affirmed the Aa1 rating benefits from its flagship status with a highly regarded brand, sizeable research funding, and substantial liquidity that provides "significant runway to manage through the operational and financial coronavirus uncertainty that continues to impact both the university and medical center." The university generated $7.2 billion in fiscal 2019 revenue from operations, state aid, and investment income.
University of Iowa
The University of Iowa Facilities Corp. received seven bids on $32.8 million of refunding bonds auctioned late last week. Baker Tilly Municipal Advisors LLC advised on the deal. Ahlers & Cooney PC is bond counsel.
The university failed to attract any bids in its late April sale of $17 million of refunding debt backed by athletic facilities revenues — a riskier prospect for investors with football and other sporting events on hold — and received just one bid on a telecommunications issue that sold the same day.
Baker Tilly attributed the stronger interest last week to the general revenue backing and a more stable market.
The school’s offering statement references COVID-19 15 times and refers investors to a voluntary notice of disclosure dated May 26, 2020 on financial impact projections posted on the Municipal Securities Rulemaking Board’s EMMA website.
The university projects a $62 million impact through August before counting any federal funds. Stimulus funding allocated in CARES is about $16 million with 50% of which is expected to go directly to aid students. The university is not refunding students’ tuition for the spring 2020 semester, but it has refunded some room and board, recreation, and arts & cultural events fees.
The Iowa City-based university shifted to on-line classes in March. “The continued impact of COVID-19 on social interaction, travel, economies and financial markets may adversely affect University finances and operations” and value of the university’s investment portfolio but the cost can’t yet be determined, the disclosure said.
In April, university staff prepared various recovery scenarios with varying levels of severity but the financial impact has been tempered by cost savings measures such as furloughs and a traveling freeze. The university is planning for on campus enrollment in the fall and is developing plans to safely accommodate students, faculty and staff.
University of Iowa Hospitals and Clinics, which halted elective surgeries in March, is still estimating near breakeven operations for fiscal 2020.
Ahead of the sale, Moody's affirmed the school’s Aa1 rating and stable outlook. Moody’s rates $1.4 of university debt Aa1 and Aa2 depending on the pledged revenues. The university's consolidated operating revenue is $3.8 billion, including the hospital enterprise, Moody’s said.
S&P affirmed the university’s AA rating on the general revenue pledge and AA-minus on several other revenue pledges including athletic facilities. The school has about $1.5 billion of debt including about $342 million in separately secured hospital revenue bonds.
The university is budgeting for a slight decline in state appropriations and is uncertain about meeting the covenanted levels in fiscal 2021 for university housing and dining, memorial union and recreational facilities if a large COVID-19 outbreak occurs on campus which requires students to leave.
Fitch Ratings said Monday it completed a review of all its college and university portfolios applying criteria announced in June 2019. About 75% of ratings went unchanged while the remainder were an evenly mixed of downgrades and upgrades. About half of the schools that saw rating changes were due in whole or in part to the change in criteria.
“Nearly 90% of rating outlooks are currently stable,” Fitch said Monday. “For public institutions, scoring was clustered in the AA and A categories, which corresponds with the median rating of AA-minus,” Fitch said.
The criteria adopted last year places a heightened emphasis on a school’s leverage through a normal business cycle scenario. In reviewing credits amid the pandemic, Fitch now applies a baseline case that assumes most residential campuses will be closed for three to four months with sporadic closures possible thereafter.
S&P assigns a negative outlook to the higher ed sector that predates the pandemic. “We believe that the COVID-19 outbreak and related economic and financial impacts exacerbate pressures already facing colleges and universities,” S&P wrote in April.