MSU turns to private placement to finance sex abuse settlements

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Michigan State University has turned to a private placement to fund legal settlement expenses for the Larry Nassar sexual abuse cases.

University officials said the decision was driven by the timing of settlement payments, though it also allows Michigan State to avoid coming to the public markets while the Nassar scandal is fresh in buyers' minds.

The private placement carries a maturity of up to two years in order to meet the settlement’s narrow payment timing requirements, said MSU spokesperson Emily Guerrant.

“It is still the university’s plan to eventually finance portions of the private placement through long-term bonds,” Guerrant said. The school declined to name the bank providing the private placement.

Moody’s Investors Service Tuesday withdrew the Aa2 rating on the revenue bonds MSU had planned to issue for the settlement, citing the university's plan to delay the transaction and issue the $500 million direct placement instead.

In June, the university's trustees approved the $500 million settlement and related bond sale. More than 300 girls and young women sued the university for failing to act against Nassar for sexually abusing them. Nassar was sentenced in January to between 40 and 175 years in state prison after pleading guilty to counts of criminal sexual conduct.

Guerrant said the original settlement plaintiffs have already signed an agreement for the settlement but it must be approved by five judges, each in different parts of the country.

“One of the judges is located in California where the state has a required judicial review period for settlements,” Guerrant said. “We do not expect judicial approval prior to the end of the review period [in mid-October]. After all five judges have signed in approval, the university must fund and pay the settlement amount within 10 calendar days.”

MSU plans to close the private placement within that ten calendar day period following judicial approval.

Moody’s downgraded MSU one notch in May. It assigns a negative outlook. S&P Global Ratings downgraded the university’s debt to AA from AA-plus in July after MSU announced plans to finance the settlement. The outlook is negative.

Delaying the long-term public offering gives the school time to put some distance between the scandal and pricing of bonds.

Moody’s said that the school currently intends to issue long-term debt later in 2018 or in 2019 to fund its planned capital projects and refund shorter-term debt obligations, including portions of the direct placement and its outstanding commercial paper. The trustees in June approved a separate bond resolution for $381 million to support university construction projects.

The private placement spares the school from “the very public headline risk of people covering and quoting price trends on a bond related to systemic child abuse by an MSU doctor,” said Matt Fabian, a partner at Municipal Market Analytics. Fabian also noted that a bank loan, in theory, would allow the bond to be more easily restructured in case an alternate funding source is discovered.

The headline risk was a concern when the school initially announced plans to bond to finance the settlement. Buyside sources said at the time that they anticipated MSU would have to pay a penalty to float the deal both because of the nature of what it would finance and the roughly 40% jump in leverage the bonds would represent for the school. Other analysts, though, said any market penalty was likely to be small.

Howard Cure, director of municipal bond research at Evercore, said that within two years the public’s memory may have faded and with it, offer more attractive yields for the university.

“The drawback to going the private placement route is really for current holders of MSU debt, since this private placement transaction may not have the same disclosure requirements as a publicly traded bond transaction,” Cure said. “It would then be up to the issuer to update the market on any new, germane, events that they are sharing with the loaning bank.”

As of Wednesday, Michigan State had not posted any information about its private placement plans on the Municipal Securities Rulemaking Board's EMMA disclosure website.

The issuance of $500 million amounts to approximately a 40% increase in MSU’s outstanding debt, which was $1.15 billion as of fiscal 2017.

Lawsuits 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.

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