N.J. Med School Returns From 7-Year Bond Break With $253M

After a seven-year hiatus from bonding, the University of Medicine and Dentistry of New Jersey today plans to sell $253 million of revenue refunding bonds with a special "lockbox" structure to secure debt service payments.

UMDNJ's last deal was $87.4 million of certificates of participation issued in 2004. This will be the university's first bond transaction since 2002, when it sold $319 million of revenue bonds. The New Jersey Educational Facilities Authority will serve as conduit.

Morgan Stanley is book-runner for the deal. Acacia Financial Group Inc. is the financial adviser and Gibbons PC is bond counsel.

Moody's Investors Service rates the Series 2009B bonds Baa2 with a negative outlook. Fitch Ratings assigns its BBB-plus rating with a stable outlook to the sale, but does not rate the school's prior debt. Standard & Poor's rates the credit BBB with a stable outlook, but does not rate the Series 2009B bonds.

NJEFA executive director Roger Anderson said the school decided to include Fitch but did not ask Standard & Poor's for a rating on the deal.

"We wanted to get a new look from somebody and Fitch did a very nice analysis," he said.

The transaction offers serial maturities from 2012 to 2018 and three term bonds in 2023, 2028, and 2032, according to the preliminary official statement.

Officials anticipate a new lockbox strategy will help the university at market. The plan involves New Jersey's Treasury Department placing UMDNJ's state allocations into a reserve instead of distributing the funds directly to the school. Those funds will be used first to pay down debt service, with any remaining allocations going to the university's coffers.

New Jersey appropriated $218.5 million to UMDNJ in fiscal 2009, and the state's fiscal 2010 budget, which lawmakers are currently working on, allocates the same amount.

"We want to improve the credit structure for the bonds so it will appeal to more investors and therefore lower the interest rates that the college is going to have to pay," Anderson said.

The university has $685.4 million of total long-term and capital-lease debt outstanding. The lockbox will reserve funds to pay debt service on the Series 2009B bonds and the 2002A bonds, accounting for 70.3% of the school's debt, according to Fitch.

The deal's structure also gives UMDNJ room for additional bond financing in the future. After the issuance of the Series 2009B bonds, the lockbox debt will have debt service coverage of five times. Under the bond agreements, that level can dip to three times coverage, leaving the university with room to issue possible new-money debt in the future or take advantage of refundings.

"We hope this structure will enable them to come back to the market at some point in the future," Anderson said. "Whether, when rates come down, they can refund some of the old series or if at some point they decide they need new money. The agreements have an additional debt test that the unrestricted state appropriation has to be at least three times the pro-forma debt service, and right now we're looking at five times. So there is the possibility of additional debt in the future using this structure."

Bond proceeds will refinance $95 million of variable-rate Series 2002B bonds that are now bank bonds and avoid acceleration payments on those securities. The transaction will also refinance $34 million of Series 2001A auction-rate lease revenue certificates into variable-rate mode and refund $89.5 million of 1995B bonds and $13.1 million of 1999C bonds.

Moody's and Fitch cite UMDNJ's operating losses and limited liquidity as challenges. In addition, a Moody's report indicates that the school could experience a downgrade within the next year unless University Hospital, which serves as a safety-net hospital in the greater Newark area, finds additional funds to support its large charity-care base or alter its operations.

"I think clearly that's what the negative outlook is meant to imply and it is at that point when the operating losses are of sufficient size at the hospital that if there's not at least the substantive improvement that they're budgeting ... that's going to cause enough pressure that we think the rating would likely move lower over time," said Moody's analyst Roger Goodman. "But I think it's important to recognize that the university and the hospital do have specific plans that are targeted to make that improvement."

Changes include reducing the average length of stay by one day to generate roughly $10 million of savings, according to the POS. In addition, UMDNJ plans to renegotiate managed care contracts and lower physician costs, among other initiatives, according to a Fitch report.

UMDNJ declined an interview but spokesman Jeff Tolvin sent a statement via e-mail.

"The university is optimistic that the financial stability of the University Hospital will improve the university's future liquidity position," he said.

University Hospital has a projected operating loss of $23.1 million in fiscal 2009, which ends June 30, down from $57.3 million the year before. In June, UMDNJ will have $74 million of unrestricted cash and investments, or just 15 days' cash on hand, according to a Moody's report.

Moody's and Fitch note that the university has implemented greater oversight and transparency following a period of overbilling for Medicaid that prompted a federal monitor of the institution from 2005 to 2007. UMDNJ has $89.2 million of Medicaid liabilities. Of that amount, the state agreed to forgive $23 million and allow the school to pay another $23 million in yearly payments from fiscal 2013 to fiscal 2025, according to the POS. Officials are still negotiating the remaining $43.2 million.

Student demand continues to be strong, Goodman said, and UMDNJ is a major presence in the state with eight schools among four campuses. It employs 15,261 full-time and part-time staff. In addition to the $218.5 million allocation the school expects to receive from the state in fiscal 2010, Gov. Jon Corzine tagged on an additional $30.9 million for UMDNJ in his fiscal 2010 budget proposal.

"I think the deal has also helped cement a closer relation between UMDNJ and the state," Anderson said. "Which you can see in the fact that the governor asked for a larger appropriation to the university, which is related to stabilizing the financial condition of the hospital."

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