WASHINGTON — The University of North Carolina at Chapel Hill next week expects to issue $224 million of tax-exempt debt and Build America Bonds, which will be used to finance or refinance the costs of certain capital projects.
The bond financings come as North Carolina public universities’ budgets have been slashed 12% over two fiscal years.
The country’s first state university plans to sell $109 million of general revenue bonds to redeem outstanding commercial paper and $115 million of BABs for new construction projects for infrastructure, science facilities, the Carmichael Auditorium, and the Kenan Stadium, according to Moody’s Investors Service. Chapel Hill is the main campus of the eight operated by the North Carolina University system.
The bonds are rated Aa1 by Moody’s and AA-plus by Standard & Poor’s and Fitch Ratings. The Series A tax-exempt bonds will mature between one and 20 years. The Series B BABs will mature in 30 years.
Bank of America Merrill Lynch is the lead underwriter. Barclays Capital, Wells Fargo Securities, LLC, JPMorgan and Morgan Keegan & Co. are co-underwriters.
Parker Poe Adams & Bernstein LLP is the bond counsel and Prager Sealy & Co. is the financial adviser.
The university expects to have about $57 million of commercial paper outstanding after this deal, said Brian Smith, director of treasury at Chapel Hill. The commercial paper is rated A-1 plus by Standard & Poor’s and P-1 by Moody’s.
Triple-A rated North Carolina helped close a $4.5 billion budget deficit for fiscal 2010 with a non-recurring 5% budget cut to state universities. University budgets were cut 7% permanently in fiscal 2009.
Chapel Hill relies on state appropriations for about 24% of its revenue. These funds are considered state money and, along with student tuition and some private donations, cannot be pledged to debt service. Chapel Hill’s funds available for debt service payments fell 1% in fiscal 2009 and covered “pro-forma debt” 1.2 times, according to Moody’s.
To offset the lower state appropriations, the university’s 26,707 full-time students are being asked to pay more in tuition costs. In-state students are paying $5,626 this academic year, up 4% from last year.
To raise additional revenue, the university could raise its current 18% cap on enrolled students from other states, Moody’s said. Out-of-state students are paying $23,514 this academic year.
Chapel Hill is the most selective public university rated by Moody’s, with 32% of freshmen applicants accepted in the fall of 2009, the rating agency said. Moody’s noted the tuition is still “remarkably affordable” and that North Carolina is expecting a 35% increase in the number of public high school graduates over the next decade.
About 10% of Chapel Hill’s $1.39 billion of outstanding debt is variable-rate bonds that were issued in 2001. The university has three fixed-payer swap agreements associated with the debt that, as of Oct. 19, had a market value of negative $42 million, according to Moody’s.
The university has not had to post collateral for the swaps and will not need to unless it is downgraded to A1 by Moody’s and A-plus by Standard & Poor’s, Smith said. The swaps are “performing as originally planned,” and the university continues to monitor the swaps, he said.
The university provides its own liquidity for tender options and also has a $300 million line of credit with Wachovia Bank NA, now owned by Wells Fargo Co., Smith said.
The school’s endowment fell 19.6% in fiscal 2009, cutting 21% from the university’s available funds. But during the first three months of fiscal 2010, the endowment’s investments have gained 4.3%.
This spring, the North Carolina University system hired Bain & Co. as a consultant to overhaul its operations. The consulting firm has made recommendations to the system’s board of trustees, and the chancellor’s office established an office to implement the recommendations.
Smith said the consulting costs were covered by a private donor.