Northwestern offering $500 million of top-rated taxable paper

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CHICAGO – Evanston, Ill.-based Northwestern University is heading into the taxable market Wednesday to sell $500 million with a warning from one rating agency that it’s at risk of losing it top rating unless operating performance improves.

The sale is tentatively structured with terms due in 2050 and 2057 with the first subject to a traditional municipal 10-year call and the second to a make-whole call typical in the corporate market. Goldman Sachs and Wells Fargo Securities are lead managers. Prager & Co. LLC is advising Northwestern.

Proceeds will finance projects on its Evanston and Chicago campuses including a biomedical research building on its Chicago campus. The $455 million project is being funded from gifts, bond proceeds, and $160 million from Lurie Children's Hospital. Some proceeds will also go to pay down short term debt.

Ahead of the sale slated for Wednesday, Moody’s Investors Service affirmed its Aaa rating but revised its outlook to negative from stable.

The change “reflects a combination of increasing debt and weakening of historically strong operating performance as leadership heavily invests in strategic initiatives and new facilities and programs,” Moody’s said. “A return to stronger operating performance is critical to sustain the Aaa rating given heightened leverage.” The university expects such improvements beginning in fiscal 2018.

The university is challenged by an increasing debt load that is 160% higher than in fiscal 2012 and thinner cash flow as the university makes strategic investments, its debt structure, and $2 billion of unfunded investment commitments within its endowment, Moody’s said.

Fitch Ratings and S&P Global Ratings affirmed the prominent school’s AAA ratings and stable outlooks.

S&P said the highly selective university’s “exceptional demand and enrollment profile, as well as its solid management team, with excellent strategic planning and governance…record of strong full-accrual operating performance and effective financial management policies” combined with “significant cash and investments compared with outstanding debt” drive the AAA.

"The outlook on all long-term ratings is stable, reflecting our belief that the university's demand trends will remain strong," said S&P analyst Jessica Wood.

The university has $1.7 billion in long term debt and $145 million of commercial paper outstanding with $200 million outstanding from $350 million in credit lines for working capital.

“As the university has become more leveraged, it's credit profile has also become more vulnerable to potential financial market volatility, since its strong reserves and liquidity are a key element sustaining the Aaa as debt has increased,” Moody’s said. The school has no additional borrowing plans in the next couple years.

The university’s balance sheet benefits from $10.2 billion of total cash and investments for fiscal 2016, excellent unrestricted monthly liquidity of $3.6 billion, a strong academic reputation and nationally ranked programs, growing net tuition per student of $31,726 for fiscal 2016, and excellent philanthropic support, with $511 million of three-year average gift revenues.

“Northwestern's healthy demand trends and diverse revenue base have enabled it to generate consistently positive operating margins. The operating margin, adjusted to include endowment spending, was a positive 4.6% in fiscal 2016, which is below the 9.3% average of the prior five fiscal years (2011-2015),” Fitch said.

Northwestern has a total enrollment of nearly 19,000 full time students at its Evanston and Chicago campuses and in two programs in Qatar.

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