National University System funds acquisition with bond sale

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The San Diego-area National University System plans to price $182 million in revenue bonds Thursday as acquisition financing for its purchase of for-profit Northcentral University, an online university.

The structure of the deal was unique in that much of the assets being acquired are intangibles like curriculum and technology, said Doug Brown, a director with Wells Fargo Securities.

“When most universities and colleges issue tax-exempt bonds it’s for buildings and parking,” said Sally Bednar, a Wells Fargo Securities managing director. “If this is not the first, then it is one of the first to use tax-exempt debt this way.”

The revenue bonds are being sold through conduit issuer California Municipal Finance Authority in two tranches: a $55 million tax-exempt series and a $127 million taxable series.

Wells Fargo is lead manager, PFM is municipal advisor and Nixon Peabody is bond counsel.

Moody’s Investors Service assigned the bonds its A3 rating with a stable outlook.

“The university’s credit quality incorporates NUS’ acquisition of Northcentral University via a proposed bond sale, which adds considerable scale, pushing its pro forma revenue base to over $420 million as a diversified provider of higher education programs,” Moody’s analysts wrote Thursday.

Northcentral offers 22 doctoral programs, 25 master’s degree programs and “one-to-one” teaching methods that are a perfect fit, said Michael Cunningham, chancellor of National University System.

The acquisition furthers the university's mission of targeting the fastest-growing segment of higher education, which is adult learners age 30 and up who are seeking master’s and doctoral degrees, Cunningham said.

National, a private nonprofit headquartered in San Diego's La Jolla neighborhood, includes four universities and colleges in the western U.S. on 34 campuses. They are National University, City University of Seattle, John F. Kennedy University, and now Northcentral University, as well as the Pre-kindergarten through grade 12 Sanford Programs, a specialized training program for teachers and nonprofit workers. The system had 15,000 full-time equivalent students in 2018.

National University, which offers both traditional and online courses, was founded in 1971 to serve returning military veterans, expanding in 2001 into the larger university system.

The university system closed on the $173.5 million purchase of Northcentral on Jan. 7. System Management Group, which oversees the university system, will be the obligor of the bonds.

The bond sale planned for next week will represent the university’s only long-term debt.

The bankers said they are happy the deal will be pricing this upcoming week, rather than earlier in the year when the market was more volatile.

“We feel like the markets have settled down, though 2019 did open with volatility in both the equity and tax exempt markets,” Bednar said.

They are expecting a very strong reception for the bonds, particularly from taxable buyers who have shown interest in the long end of the curve, Brown said.

“We think the credit is very strong at an A3 rating and it has a long history of strong operating performance,” Brown said.

The deal also comes at a time when there has been a drop-off in municipal bond market activity for college and university transactions.

S&P Global Ratings analysts reported issuance for 2018 in that sector dropped by about 80% to $8.8 billion from $19.1 billion in 2017, according to Thomson Reuters data.

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Higher education bonds Primary bond market California Municipal Finance Authority California