DALLAS — After sitting out 2011, the University of Texas System Board of Regents will offer $200 million of top-rated revenue financing system refunding bonds to a receptive market this week, followed shortly by another $235 million deal.
Proceeds of this week’s deal will refinance $186.3 million of commercial paper, refund some bonds, and finance projects at the system’s Medical Branch in Galveston and its Pan American campus. After this offering, the system will have $389.6 million of tax-exempt and $40.7 million of taxable commercial paper outstanding.
The UT regents plan to issue $235 million of additional debt in the next month to refund about $95 million of current outstanding commercial paper, with the remainder to finance new projects.
RFS debt is secured by a lien on and pledge of all legally available revenues, funds and balances of the system’s 15 member institutions. All three major credit-rating agencies have affirmed their triple-A ratings.
“The triple-A rating reflects our view of the system’s significant financial resources, broad revenue diversity, and historically stable operating performance,” Standard & Poor’s credit analyst Bianca Gaytan-Burrell said in a statement. “Further strengthening the rating is our view of the system’s high-profile credit institutional characteristics — including significant research activity, a large health care component and enrollment of more than 215,000 students.”
The bonds are pricing through negotiation, with a syndicate led by Barclays Capital and RBC Capital Markets that also includes Estrada Hinojosa & Co., Jefferies & Co., Morgan Keegan & Co., Siebert Brandford Shank & Co. and Wells Fargo Securities. The UT system serves as its own financial advisor, with McCall, Parkhurst & Horton as bond counsel.
The regents are selling into market that has shown strong appetite for recognized credits. Muni bond fund flows have remained positive for the past eight weeks.
The UT deal is expected to come to market in the same week as another Texas higher education credit, Baylor University, issues $120 million of bonds for expansion projects through conduit the Waco Higher Education Corp.
Baylor’s bonds are rated AA-minus by Standard & Poor’s and Fitch Ratings. Baylor is a private Southern Baptist university.
On Jan. 5, the Texas Tech University System Board of Regents priced about $190 million of its own revenue financing system bonds, earning a yield of 4.08% on 4% coupons maturing in 2041. The bonds were rated AA by S&P and Fitch.
Last year, bond issuance for colleges and universities in Texas fell 67% to $865.8 million. Deals announced this year already would amount to more than half of that total.
One of the major beneficiaries of the UT System bonds will be the Jennie Sealy Hospital on the University of Texas Medical Branch campus in Galveston, which will account for about $122 million of new-money debt.
UT regents at one time considered moving the medical school from Galveston after Hurricane Ike caused widespread damage on in September 2008. Since then, research and education activities have been restored, and most clinical operations are back to pre-storm levels, according to officials. The cost of the recovery at UTMB was estimated at $1.2 billion.
The regents will also provide about $28 million from bond proceeds for a performing arts center at the University of Texas Pan American campus in Edinburg in the Lower Rio Grande Valley of South Texas, which enrolls 19,000 students.
With its main campus in Austin, the UT System has an endowment with a market value of $19.1 billion as of Dec. 31, 2011, ranking it among the five largest higher-education endowments in the U.S. The endowment includes the $12.3 billion Permanent University Fund, of which two-thirds benefits the system.
The system carried more than $5.8 billion of RFS bond debt before the latest deal. The largest single issue was a Series 2008B deal of nearly $640 million.
Last year was the first time in five years that the UT System did not issue any RFS bonds.
In addition to the revenue financing system, UT issues debt backed by the Permanent University Fund. The RFS is secured by tuition and other available funds. The PUF debt is backed by income from the fund, which includes state land and other holdings. The system has about $1.7 billion of PUF debt.
Maximum annual debt service on both programs is about $576 million, amounting to about 4.4% of 2011 operating expenses.
In the last eight years, the UT System has more than doubled its outstanding debt, which includes RFS and bonds backed by the PUF, to $7.7 billion as of January from $2.8 billion on Aug. 31, 2003.
“While we believe this — as well as the additional planned debt issuance — comes with risk, we believe the high debt level is somewhat mitigated by the system’s strong historical operating performance, large revenue base, revenue diversity, overall financial resources (including the PUF), steady state capital support, and still-moderate 4% debt burden,” S&P’s Gaytan-Burrell wrote. “As such, we expect that even substantial additional debt will remain manageable relative to the budget.”
On its commercial paper and notes financing, the UT System provides its own liquidity support through the UT Investment Management Co. UTIMCO manages all internal operating funds for the system, as well as endowments.
Under the purchase support agreement, UTIMCO agrees to purchase any unremarketed debt, up to the full principal amount outstanding, in the event that investor puts or redemptions are not remarketed.
“The resources behind this liquidity pledge remain substantial in our view, even in light of recent market declines and disruptions,” S&P said. “As of Dec. 31, 2011, they included $4.5 billion of investments with daily liquidity from UT’s short-term fund and intermediate-term operating funds, as well as in the endowment investments managed by UTIMCO.”
While finances remain tight for state universities in Texas and elsewhere, there have been no more major retrenchments announced so far this year. Tax revenues in Texas are rebounding from the recession that brought deep cuts to education in last year’s legislative session. The state Legislature does not meet this year.