The New Jersey Educational Facilities Authority yesterday approved up to $800 million of refinancing debt, including $575 million for the University of Medicine and Dentistry of New Jersey.

The UMDNJ transaction will take the school's monthly state-aid payments and designate them for paying down debt service costs. The university receives about $200 million of state aid annually, with more than $180 million of that to be used for debt service payments. That structure will enable it to have debt service coverage of three times, according to authority executive director Roger Anderson.

"What we're looking at is a way to improve the credit picture by taking the state aid payments and segregating them in like a lock box to fund the debt service fund, and then the waterfall flows back to the university so that it gives the investors a prior claim on the state aid to improve the credit picture," Anderson said. "Doing that, we think the rates are going to be good enough that there's a good chance we can refund on an economic basis a lot of [UMDNJ's] other debt. So that's why the size is big - there's no new spending, just opportunistic refundings."

Anderson said that officials do not anticipate issuing the entire $575 million, but wanted to authorize a larger amount in the event of favorable market conditions that might offer attractive refundings. While the school's priority is to address two variable-rate series that total $130 million, officials will consider refunding other series, depending on market conditions. The refinancings could price in December or January as officials are getting the documents in order.

Morgan Stanley is book-runner on the transaction. Gibbons PC is bond counsel and Acacia Financial Group Inc. is financial adviser. Standard & Poor's and Moody's Investors Service rate the university BBB and Baa2, respectively, both with negative outlooks. UMDNJ has roughly $648 million of outstanding debt.

Current plans call for refinancing Series 2001A auction-rate lease revenue certificates for $34 million into variable-rate debt. Those securities carry MBIA Insurance Corp. backing and the new variable-rate bonds will have a letter of credit from Bank of America NA.

At the same time, officials would like to terminate a $34 million, floating-to-fixed rate swap agreement with Lehman Brothers Special Financing. Last week, the mark-to-market value on the swap was $6 million, Anderson said. Under the current agreement, the university pays a fixed rate of 4.88% and receives either a percentage of SIMFA or 65% of one-month London Interbank Offered Rate, as the benchmark for the floating-rate payment changes.

The second refinancing includes Series 2002B variable-rate bonds for $95 million with Ambac Assurance Corp. insurance that the authority plans to refinance into fixed-rate debt. Those bonds have additional enhancement via a liquidity facility provided by Bank of America.

Officials have been working on refinancing these two series since the summer, but Anderson said that designating state aid payments for debt service costs may help the school finish the sale, in particular since the market has been volatile since Lehman Brothers declared bankruptcy in mid-September.

"If we can get good enough rates with this structure, than a lot of the other bonds become economic to refund depending on what the market is," Anderson said. "Pre-Lehman, there looked like a lot of things that were good to refund and once the market gets back to semi-sane levels, maybe they will again."

Other possible refunding candidates may include all or a portion of Series 1995B bonds, Series 1999 C bonds, and Series 2000 lease revenue bonds.

In addition to the UMDNJ transaction, the board approved up to $225 million of refinancing for Kean University, which will allow the authority to refinance all or a portion of Series 2007E auction-rate securities into fixed-rate bonds. RBC Capital Markets could price the transaction sometime around Thanksgiving, Anderson said.

McCarter & English LLP is bond counsel and Public Financial Management Inc. is financial adviser.

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