University bond deals demonstrate value of structuring flexibility

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New York University and senior manager Wells Fargo maintained a flexible posture amid many variables throughout pricing for a recent $593 million sale of tax-exempt and taxable revenue bonds.

The offering consisted of $349 million of Series 2018A tax-exempt bonds and $244 million of Series 2018B taxable bonds.

Facing an uncertain market with low supply, a flat yield curve and a large tranche of long-dated taxable bonds to be sold, the university and underwriter shifted a portion of the long-dated bonds between the taxable and tax-exempt series to meet investor demand, according to a bank representative.

Certain tax-exempt maturities were structured with a five-year par call with no premium. Spreads were favorable compared with past transactions, the Wells Fargo representative said. The bonds, priced May 4 through the Dormitory Authority of the State of New York conduit, were rated Aa2 by Moody's Investors Service and AA-minus by S&P Global Ratings.

Wells Fargo also priced $96.7 million of bonds for University of New Haven, structuring the deal with serial tax-exempt bonds and serial taxable bonds.

The issuance refunded outstanding bank debt, which has helped fuel development of the university in the last decade from a commuter school to a residential campus with expanded facilities.

Investor demand for the tax-exempt bonds pushed total orders to $423 million, resulting in oversubscription of most maturities and aggregate oversubscription of 4.9 times.

The deal priced April 12 through the Connecticut Health and Educational Facilities Authority conduit. S&P rated it BBB.

The university plans to issue an additional $25 million in bonds in July to support the development and construction of the Bergami Center for Science, Technology, and Innovation.

"The University of New Haven’s bond issuances mark a significant step in the university’s transformation, as more and more students have turned to the [university] to gain a top-tier education,” said Stratford Shields, head of Wells Fargo Securities’ public finance group, which serves government and Institutional banking clients.

Institutions are still exploring growth in student housing despite the maturing of that market, according to Wells Fargo senior analyst Roy Eappen, who said one of the advantages of student housing is the countercyclical nature of higher education demand.

“Also, with a bull market in commercial real estate that has continued for some time, student housing is seen as a safer alternative,” he said.

Well-executed public-private partnerships can help universities defease debt while retaining control, according to John Picerne, founder and chief executive of East Greenwich, R.I., P3 firm Corvias.

Higher education’s infrastructure challenges reflect those of other municipal issuers, said Picerne, whose firm began working with military housing before venturing into universities.

“What we found was that cities, states and institutions like higher ed were all suffering from underspending on their maintenance programs, creating these large deferred maintenance bills and actually digging a hole that they themselves haven’t been able to get out of,” Picerne said on a Bond Buyer podcast.

The Association of Higher Education Facilities Officers pegged the backlog at $30 billion.

Corvias’ signature P3 deal freed roughly $550 million in credit capacity for the University System of Georgia for institutional capital needs.

Improving housing and marketability to students, said Picerne, typically improves the credit standing of schools.

“The way we structure our programs is that almost all of the net cash flow goes down and gets held in a reserve account for sustainability, for long-term maintenance and management, for future upgrades to the facility, so that basically when we’re done whether it’s in 35, 40 or 50 years -- depending upon the length of our programs – when the program is completed, the institution gets like-new facilities to themselves, to their ownership, basically.

“So the credit agencies have looked at it and said, ‘Wow, that’s actually a credit positive to us.’”

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Higher education bonds Sell side Public-private partnership New York State Dormitory Authority Connecticut Health & Educational Facilities Authority Corvias New York University University of New Haven Connecticut New York