CHICAGO — Indiana University, a triple-A rated credit, will hit the market Thursday with $96 million of student-fee revenue bonds to finance construction of a neuroscience building.
Like all of the university’s $952 million of outstanding debt, the new bonds will be issued in a fixed-rate mode. About $495 million of IU’s total debt consists of student-fee revenue bonds.
With projected 2011 fall enrollment of around 80,000, IU is one of the nation’s largest universities. The system includes eight campuses, with its main ones in Bloomington and Indianapolis.
Rating analysts praise the school for its fundamental credit strengths, but warn that its debt load and ongoing capital needs could be a challenge, particularly in light of declining state aid.
Barclays Capital is the underwriter. while City Securities Corp. and Cabrera Capital Markets LLC round out the team. Ice Miller LLP and Coleman Stevenson & Montel LLP are co-bond counsel.
Moody’s Investors Service affirmed its Aaa rating ahead of the sale. Standard & Poor’s maintains a AA-plus rating on the credit, after upgrading it last December. In its upgrade, analysts praised IU for its consistently strong financial management, good fiscal planning, and other credit strengths that should help the school manage through a “constrained state funding environment.”
IU receives about 20% of its revenue from the state. In fiscal 2010 and 2011, Indiana cut the school’s aid by $22 million and $29 million, respectively, according to Moody’s.
For the upcoming 2012-2013 biennium, the Indiana General Assembly reduced aid by 2%, or $9.1 million.
To offset the state cuts, IU implemented measures that included early retirement programs. The school estimates its capital financing needs at $58 million, a borrowing level that analysts deem manageable.
The bonds are secured by a pledge of the university’s student fees, excluding fees pledged to other bonds and state aid, and are not secured by a debt-service reserve fund.
Nearly all of the university’s student fee debt is eligible for debt service reimbursement by the state, according to Moody’s.
“Our rating reflects expectations of continued debt service funding for fee replacement debt,” analysts wrote.
With student fees totaling $1.14 billion in 2011, debt service coverage for Indiana University’s debt is expected to total 14.09 times, according to bond documents.
The university has pledged that it will collect fees each year that equal or exceed two times annual debt service coverage for all its bonds.