CHICAGO - The University of Illinois has pushed off until next month its planned $85 million new-money and refunding bond sale after abandoning plans for a floating-rate transaction in favor of a fixed-rate one as rates have grown more attractive.

The auxiliary facilities system revenue bonds that were to have sold this month are instead to sell in mid-March with Citi serving as the senior manager, said Robert Plankenhorn, director of capital financing. About $18 million of the sale will go towards financing for a new union at the University of Illinois' main Urbana campus.

The remainder will refund variable-rate debt issued in 2005 that carries insurance from Financial Security Assurance. The university experienced a spike in interest rates after Moody's Investors Service downgraded the insurer last November. Although some bonds failed during past remarketing cycles, only about $1 million is now held by State Street Bank, the liquidity bank.

The university, which issues its debt through the University of Illinois Board of Trustees, initially planned a variable-rate refunding, but shifted to a fixed-rate structure as interest rates fell over the last month. "When we first started contemplating this transaction, fixed-rates were just so far out of the money," Plankenhorn said.

Although the conservative university has had just limited exposure to floating-rate fluctuations because of insurance, Plankenhorn prefers shifting to the fixed-rate mode because of the absence of any liquidity or bank support.

"I am reevaluating my risk tolerance to counterparties, insurers and banks because of our experience" during the capital markets crisis, he said. "The past year has shown us the risks are real."

Public Financial Management Inc. serves as financial adviser to the university.

Moody's affirmed the Aa3 rating assigned to the university's auxiliary revenue bonds while revising its outlook to stable from positive. The action affects $1.66 billion of outstanding debt.

Analysts said the action reflects "stable to modestly declining financial resources" driven by investment losses and cash flow that could be strained by an expected decline in state funding as Illinois grapples with an $9 billion budget deficit.

The auxiliary bonds are secured by net revenues of the auxiliary facilities system and student tuition and fees subject to prior payment of system expenses. The pledged revenues provided maximum annual net debt service of 9.6 times in fiscal 2008, Moody's wrote.

The university benefits from its status as the state's flagship school with more than 70,000 students, strong demand, a prominent research reputation with $773 million in research funding won in fiscal 2008 and membership in the Big 10 Athletic Conference.

Fiscally, the university has generally balanced operations, with good cash flow and debt service coverage, despite constraints on state funding levels in recent years. The university has raised about $1.5 billion as part of a $2.25 billion capital campaign dubbed Brilliant Futures through 2012 with plans to put a good amount of the funds towards its endowment.

Credit challenges include a high level of debt, modest financial resources for a university of its size, and risks associated with its health services facilities system and its $60 million capital program, which includes a proposed new patient tower. The university also faces a possible drop in state funding levels at lawmakers grapple with their own budget crisis. The annual return on investments for fiscal 2008 was about negative 5.3% and for fiscal 2009 it's expected to be negative 19%.

"Although University of Illinois has increased its total financial resources since 2002 [to $1.74 billion], the greatest credit challenge remains its highly leveraged balance sheet as it has needed to fund its substantial capital needs through debt issuance given the lack of capital support from the state," Moody's wrote.

The state has lacked any new borrowing authorization for capital projects for the last six years, although lawmakers and Gov. Pat Quinn have said a capital program is a priority this year.

Standard & Poor's rates the university AA-minus.

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