CHICAGO Triple-A Northwestern University in Illinois plans to offer as soon as Wednesday nearly $600 million of taxable debt to raise new money for ongoing capital work and refund some now callable debt for savings.
Morgan Stanley and Wells Fargo Securities are joint bookrunners with Bank of America Merrill Lynch and Loop Capital Markets LLC rounding out the team. William Blair & Co. is financial advisor and the university’s special counsel for the transaction is Schiff Hardin LLP with Jones Day serving as underwriters counsel.
Ahead of the sale Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s affirmed the university’s top ratings and stable outlook. The university which operates its main campus on the shores of Lake Michigan in the city of Evanston -- will have about $1.1 billion of rated debt, when its commercial paper program is counted, after the sale. About $400 million of the issue represents new money.
The university opted to forgo tax-exemption after comparing spreads offered in the taxable market given its high-grade name and the additional incentive provided by the lack of compliance and lower issuance costs, said market participants working on the transaction.
“The Aaa rating reflects the university’s strong governance, market position, financial condition, and operations, offset by rising balance sheet leverage, substantial future capital plans and a debt structure with large future debt bullet maturities,” Moody’s said of the credit.
“Substantial balance sheet resources remain a primary credit strength of the university,” Fitch wrote.
The highly selective school’s credit attributes include a strong national academic reputation and research presence with $508 million in research awards in fiscal 2012, strong gift revenue of $260 million last year, and a sturdy financial cushion from $7.4 billion in financial resources. It faces challenges from its rising debt levels.
“The $400 million new money portion of the Series 2013 bond issue represents a substantial increase in balance sheet leverage, with significant remaining capital plans which will likely lead to additional debt issuance in two to three years,” Moody’s wrote.
The university also is up against “fierce” competition for high quality students as well as research dollars, Moody’s said. The university’s debt structure, with long-dated bullet maturities and a March reset on a good chunk of its floating-rate paper, also poses a challenge, as does its exposure risk to the federal budget.
The school founded in 1851 -- has a high net tuition per student of $32,853 but continuously sees strong demand. In addition to Evanston, it operates campuses in Chicago and in Qatar with total full time enrollment of 16,000 on all campuses. Its balance sheet was bolstered with an infusion of $564 million in unrestricted proceeds from its August sale of remaining royalties tied to the drug Lyrica and from a clinical affiliation agreement. Total expendable resources cover debt by 4.6 times. Annual operating revenue totals nearly $2 billion.
Northwestern has eliminated its direct exposure to health care risks through the transfer of its health care assets. The university, which operates The Feinberg School of Medicine, has a clinical affiliation agreement with a group that includes Northwestern Memorial HealthCare and it received payments of $210 million so far under the various clinical agreements to benefit its medical school.
The university currently has six interest rate swaps with a liability estimated at $30.8 million based on recent market conditions. Liquidity and termination risks, however, are minimal given the school’s $2.46 billion balance of unrestricted resources.
Northwestern has more about $1.78 billion of projects either under construction, being planned, or under study, according to Fitch. The capital plan runs through fiscal 2021, and includes academic, athletics, housing and infrastructure-related projects, Fitch said. Funding comes from a mix of gifts, grants, cash and debt, including the new issuance.
Under guidelines adopted last year, construction cannot begin until the university has 100% of the pledges or other funding sources in hand and at least 75% cash in hand with the balance to be received within seven years of project completion, Moody’s noted.
The program includes a major new research facility on the university’s Chicago campus with research and patient care facilities. The university and its medical school and Northwestern Memorial Healthcare, a faculty foundation, and Lurie Children’s Hospital are sharing in the project’s cost.