LOS ANGELES -- The Regents of the University of California will price $2.6 billion of revenue bonds on Wednesday to refund and restructure its outstanding California State Public Works Board lease revenue bonds.

The deal includes $700 million of tax-exempt bonds, $700 million of taxable bonds, $600 million of tax-exempt bonds issued in term mode, with mandatory tenders to be determined during marketing, and $600 million of variable rate demand bonds.

“The restructuring of the SPWB debt portfolio under the university’s general revenue bond credit structure would allow UC to achieve cash-flow benefits at approximately $80 million for the next 10 fiscal years,” according to Dianne Klein, a spokesperson for the university. “The goal of the restructuring is to be as close to present value neutral as possible.”

Barclays Capital, Bank of America Merrill Lynch, and Raymond James & Associates, Inc. are joint senior managers for the fixed rate bonds, according to the State Treasurer’s Office.

The variable rate bonds will be sold in four tranches, which will each be priced separately by Goldman, Sachs & Co., Loop Capital Markets, Stifel, Nicolaus & Co, and Wells Fargo Securities.

The bonds are expected to have a final maturity of 2048.

The university’s debt restructuring plan was authorized under California’s state budget for 2013-2014. The university expects to refund all of its approximately $2.4 billion of outstanding State Public Works Board lease revenue bonds.

“The cash-flow savings that result from the restructuring will be applied to reduce the university’s existing unfunded pension liability,” Klein said. “This will allow for greater long-term operational budget relief.”

The original bonds were issued for capital projects, academic space, research facilities, and seismic corrections throughout the university system.

Chartered in 1868, the system currently operates 10 campuses, including in Berkeley, Davis, Los Angeles, San Diego, and San Francisco.

The state’s general fund support appropriation has been added to the university’s general revenue pledge — net of amounts necessary to fund certain GO bond debt service and any remaining SPWB bond debt service — to reflect the nature of the new obligation and repayment source to UC’s general revenue bonds.

“Though the transaction brings the SPWB debt onto the university’s balance sheet, we have always included the full amount of SPWB leases in our debt calculations for the university,” said Standard & Poor’s credit analyst Jessica Matsumori. “Thus the transition to the general revenue bond pledge does not materially change our view of the university’s overall leverage or debt capacity.”

Standard & Poor’s gave the new fixed-rate revenue bonds its AA long-term rating and stable outlook, citing the university system’s size, strength in revenue streams, and “impressive demand metrics.”

“The system has weathered several years of increasingly difficult and complex fiscal pressures,” analysts wrote in a report. “While it has implemented numerous strategic initiatives to manage through these pressures, the benefits may not fully be realized for several years, which could pressure the rating.”

The system faces risks in the next few years, analysts said, including declining operating and balance sheet metrics, growing pension and other post-employment benefit liabilities, significant deferred maintenance needs, upcoming debt plans, and pressure on all major sources of revenue.

The university’s revenues, which secure the bonds, include tuition and fees, indirect cost recovery revenues and auxiliary receipts.

Standard & Poor’s assigned the variable rate demand bonds an A-1-plus rating based on the strength of the university’s self-liquidity to cover any mandatory or optional tenders on the debt.

Moody’s Investors Service and Fitch Ratings rate the long-term bonds a notch higher at Aa1 and AA-plus, respectively.

Analysts from both cited the university’s reputation and strong student demand as credit strengths.

Moody’s assigns a negative outlook, based on five years of operating deficits, a reduction in cash flow, and a capital plan that anticipates significant additional borrowing, combined with growing expenses and pressures on revenue.

“A downgrade would be based on failure to improve expendable financial resources as it relates to debt and to operations, improve results from operations, and provide a credible plan to regain positive operations over the mid-term,” Moody’s said.

Moody’s assigned the variable rate bonds a VMIG 1 rating, and Fitch assigned an F1-plus rating.

The university sold general revenue bonds earlier this year in a $1.3 billion tax-exempt and taxable deal in February.

Yields on the tax-exempt bonds ranged from 0.17% with a 2% coupon in 2014 to 3.23% with a 5% coupon in 2039.

On the taxable portion, yields ranged from 0.18% in 2014 to 4.262% in 2039. 

Klein said the university doesn’t want to speculate about the current market, but that the mood seems good. They’re aiming to close transactions by Oct. 2.

Orrick, Herrington & Sutcliffe LLP is bond counsel. Swap Financial Group, LLC is pricing advisor.

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