Taxable advance refunding will pencil out for Texas A&M

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Texas A&M University System will supply $430 million of triple-A-rated taxable revenue bonds — including an advance refunding.

The rate environment is such that even without the tax-exemption Congress stripped away from advance refunding bonds in 2017, the university will save on the $230.5 million advance refunding Series 2013C, according to Maria Robinson, chief investment officer and treasurer for TAMUS.

Proceeds from the new money side of the deal will provide $9 million to finance projects and convert $160 million of commercial paper notes to long-term debt.

With the loss of tax-exempt advance refundings in 2018, total bond volume fell 16% to a five-year low $16.35 billion in Texas. For the first half of 2019, Texas volume of $16.05 billion is down slightly compared to the same period last year, according to Refinitiv.

The upcoming deal will send bond volume from colleges and universities in the state beyond that of the entire year of 2018 with five months left to go. In 2018, bonds issued by colleges and universities fell 90% to $767 million, according to Refinitiv data.

TAMUS' negotiated deal will price this week through a syndicate led by Jefferies, with FTN Financial Capital Markets and Loop Capital Markets as co-managers. Hilltop Securities managing director Mary Williams is financial advisor.

The deal is TAMUS’ second this year. In January, the system priced $224 million of 2019A taxable revenue bonds.

With an annual budget of $4.7 billion, the Texas A&M University System is one of the largest systems of higher education in the nation, sharing state flagship status with the University of Texas System. Through a statewide network of 11 universities and seven state agencies, the Texas A&M System enrolls more than 153,000 students.

Systemwide, research and development expenditures exceeded $996 million in FY 2017 and helped drive the state’s economy, particularly in agriculture, medicine and diverse fields of research.

The A&M System enjoyed a rewarding legislative session this year as lawmakers budgeted record revenues. Lawmakers gave the system a $157 million funding boost and passed legislation to transfer the Texas Division of Emergency Management to the A&M System as its eighth state agency.

The new money included $55 million to equalize funding per student with UT. Two years ago, state officials awarded UT an extra $55 million to address potential funding losses that would have been based, in part, on its capped enrollment. Typically, increases in higher education funding are based on growth.

The appropriations bill includes $10.4 million for a state disaster recovery task force, plus $6.8 million to use Texas A&M AgriLife Extension agents to perform disaster readiness work for the state. Other provisions included the creation of a Texas A&M Institute for Disaster Resilience as part of a $3 billion fund to support a statewide flood plan similar to the statewide water plan.

The Legislature added $201 million to universities statewide, including $19 million to support universities with enrollments below 10,000. That Small Institution Supplement will support A&M universities in Galveston, Texarkana, Central Texas, San Antonio, Laredo, Kingsville and Prairie View.

The University of Texas, which shares the $22.3 billion Permanent University Fund with the A&M System, made news earlier this month with the announcement that it would devote $160 million from the PUF for tuition assistance at the flagship UT Austin, including free tuition for students whose families earn less than $65,000 per year. Students whose families earn up to $125,000 per year would also be eligible for assistance from the fund.

The UT Board of Regents voted unanimously Tuesday to establish the tuition endowment beginning in fall 2020.

“Recognizing both the need for improved access to higher education and the high value of a UT Austin degree, we are dedicating a distribution from the Permanent University Fund to establish an endowment that will directly benefit students and make their degrees more affordable,” Chairman Kevin Eltife said after the vote. “This will benefit students of our great state for years to come.”

The Permanent University Fund includes money from oil and gas royalties earned on state-owned land in West Texas. TAMUS is allotted revenues from a third of the PUF and issues bonds backed by the fund.

A&M System Chancellor John Sharp congratulated UT on the move, noting that TAMUS has a similar program that covers the tuition for all students whose families have an adjusted gross income of $60,000 or less. Last year, it paid the tuition for nearly 7,000 students.

“In April 2018, we instituted the A&M university system regents grants, which set aside $30 million to provide undergraduates with one-time grants that had unforeseen financial hardships,” Sharp said.

Most TAMUS students come from Texas. The in-state attraction is enhanced by a state law allowing all high school students the top 10% of their graduating class automatic admission.

TAMUS has the academic reputation and student demand to admit many more students from other states or countries than it does, according to Fitch analysts.

About 42% of TAMUS' fall 2018 enrollment was at the flagship College Station campus, which had 63,694 students. The next largest campus is TAMUS-Tarleton in North Texas with 13,118 students. At College Station, which has been near capacity for some time, TAMUS has capped growth of undergraduate students but continues to increase graduate enrollment.

TAMUS has $3.28 billion of outstanding RFS principal dating to 2010, according to the system’s preliminary official statement. PUF bond debt outstanding from 1998 to 2017 is $4.54 billion, per the POS.

“The fixed-rate, rapidly amortizing RFS bond structure provides capacity for planned debt to support the system's extensive capital improvement plan,” Fitch Ratings analyst Susan Carlson noted. “Post issuance, about 31% of RFS debt principal is supported by state tuition revenue bond debt service appropriations.”

The state does not pledge TRB debt service payments to bondholders but has historically made related payments on schedule.

“Fitch views this track-record positively, as it helps mitigate annual debt burden,” Carlson wrote.

TAMUS pledged revenues run about 2.6 times higher than debt-service coverage, Fitch said.

Between fall 2014 and 2018, system enrollment grew nearly 11% to 153,094 even as other universities and colleges around the nation struggled against falling head counts. TAMUS' flagship campus serves 63,700 students in College Station, about 100 miles northwest of Houston.

“Student demand at the flagship College Station campus and other system campuses is strong with a solid demand niche and growing overall enrollment,” Carlson wrote. “Tuition and auxiliary revenues, about 28% of annual operating revenues, contribute to revenue diversity.”

The College Station campus became one of three nonprofit organizations chosen jointly by the U.S. Department of Energy to manage Los Alamos National Laboratory in 2018. Battelle Memorial Institute and the University of California are partners in the triad.

In May, Texas A&M recorded more than 500,000 degrees granted since its opening in the fall of 1876. The system awarded a record 10,767 degrees at 15 commencement ceremonies across multiple campuses.

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