CHICAGO — With an upgrade in hand, the University of Missouri System will enter the market Wednesday with up to $265 million of Build America Bonds to fund improvements at various campuses and its health care facilities.
Bank of America Merrill Lynch is the senior manager and Morgan Stanley is co-senior manager. Prager, Sealy & Co. is financial adviser and Thompson Coburn LLP is bond counsel. The bonds are tentatively structured to mature in 2041 with sinking fund redemptions in 2039, 2040, and 2041.
The university issued more than $250 million of BABs last year for ongoing capital projects, achieving more than $40 million in present-value savings over a traditional tax-exempt structure. University finance officials hastened the timing of the new financing so they could again tap the program before its expiration at the end of the year.
"We had projects that had been approved for debt financing and because it's unclear whether BABs will be extended, we accelerated the new financing in order to take advantage of the program and achieve the lowest interest cost," said Natalie Krawitz, vice president for finance and administration.
The university is banking on its solid operating performance, the strong ratings of its paper, and Missouri's top marks to attract investors in a crowded market.
"We are a highly rated institution from a triple A rated state," Krawitz said. "We think that means a lot these days."
Ahead of the sale, Moody's Investors Service affirmed the school's Aa1 long-term rating and top short-term marks, and Standard & Poor's raised its rating one notch to AA-plus. The university will have $1.4 billion of debt outstanding after the sale.
The university's system facilities revenue bonds are secured by a first lien on system revenues from various sources. They include gross income from auxiliary activities, the health system, and various mandatory student fees and tuition. Pledged revenues in fiscal 2010 totaled $1 billion while debt-service demands are estimated at $120 million, according to Moody's.
Proceeds of the sale will finance projects at the university's main Columbia campus, including residence hall renovations, power plant upgrades, and sewer and water plant projects. Its Kansas City campus is in line to receive funding for a parking structure, library additions, and other work while its Science and Technology school will receive funds for a geothermal energy project and building renovations.
The university's health system will use bond proceeds to finance a new patient tower, the relocation of a cancer center and construction of an outpatient care center. Construction began this fall on the new seven-story patient care tower that is being financed in part with bond proceeds. The $203 million project is scheduled to open in 2013. The tower will provide additional operating rooms, pre- and post-procedure rooms, private patient rooms, and a new facility for Ellis Fischel Cancer Center.
The more than 170-year-old institution offers undergraduate, graduate and professional degrees through 45 colleges, schools and other divisions. They operate at its largest campus in Columbia, and at other sites in St. Louis, Kansas City, and Rolla — which houses the Science and Technology school. The student population is more than 71,000 and has grown by 14% since 2006.
Moody's described the system as "well managed with consistently positive operating performance, diverse revenues, and a strong and growing financial resource base supporting a large expense base and increasing debt levels."
About 31% of the revenue base comes from student charges, 20% from state operating appropriations, 28% from health-related services, and 12% from grants. The university system receives about $214.5 million in research funding, mostly from the federal government. It held $1.36 billion in unrestricted cash and investments in fiscal 2010 — enough to cover the cost of operating for 220 days.
"The rating reflects MU's position as the state's flagship institution as well as its historically sound operating performance, adequate financial resource levels relative to the rating category, stable student demand, and manageable debt burden," said Standard & Poor's analyst Shari Sikes.
One of the university's fiscal challenges comes from its dramatic 114 % increase in debt over fiscal 2007 levels. However, no near-term borrowing is planned after this week's issue and many of the projects being funded with the bond proceeds will generate additional revenue to help pay off the new debt.
The school's stable outlook reflects Standard & Poor's expectation that enrollment will remain steady and the university will continue to produce positive operating results even as it faces a difficult state funding environment in the coming year.
Unlike many other state-supported higher education institutions nationally, the university escaped state cuts in fiscal 2010 and saw a limited 5% cut in fiscal 2011 after agreeing to freeze tuition for the next two years. The state is facing an estimated $700 million deficit going into fiscal 2012, which could translate into deeper cuts. Some lawmakers have said it's unlikely any new capital funding support will be available.
"The next fiscal year is an unknown," Krawitz said. "We expect cuts but we don't know the magnitude."
Moody's expects pressure on state support in fiscal 2012, with the system likely imposing tuition increases next fall and focusing on operational efficiencies to compensate.
Another challenge for the university is management of its complex health care system, which includes multiple hospitals and a large faculty practice plan of more than 400 physicians. About 23% of gross patient revenues in fiscal 2010 came from Medicaid, leaving the system vulnerable to federal cuts and federal health care reform.
Despite pressures on admissions, operating performance has remained healthy.