CHICAGO — Illinois' flagship public university heads to market Tuesday with a $180 million new money sale that offers investors high grade state-related paper from a credit that has mostly weathered the state government's ratings deterioration.
The fixed-rate sale from the Board of Trustees of the University of Illinois includes a $163 million tax-exempt series and $18 million of taxable bonds. The paper matures serially through 2034 with term bonds in 2039 and 2044. The university later in the month will follow up with an additional $50 million of taxable floating-rate bonds in a C series.
The bonds are being sold under the university's auxiliary facilities revenue credit and are secured by tuition and fees as well as the system's net revenues which come from housing, student unions, and related facilities on its three campuses.
"All of the funds will finance two new projects including our new Ikenberry Commons residence hall and an expansion and renovation of our State Farm Center which is a multipurpose venue," said the university's director of director planning Robert Plankenhorn. The residence hall is named for a former school president and State Farm Insurance purchased the naming rights to the former Assembly Hall, where Illini basketball teams play.
Wells Fargo Securities is the senior manager with Cabrera Capital Markets and Loop Capital Markets rounding out the underwriting team. Public Financial Management Inc. is advisor and Chapman and Cutler LLP is bond counsel. Wells Fargo is also the underwriter and remarketing agent on the floating rate series tentatively selling on Feb. 18.
The taxable series will fund projects at the assembly hall that involve some private use and the floating rate gives the university some flexibility to pay down the debt early, Plankenhorn said. "No other new money is on our radar for at least another 18 months," he added.
Ahead of the sale, Moody's Investors Service affirmed the Aa3 rating and negative outlook assigned to the university's auxiliary facilities revenue bonds while Standard & Poor's affirmed its AA-minus rating and stable outlook.
The university faces near- and long-term exposure to the state's fiscal pressures through state aid payment delays and the threat of reduced or stagnant annual aid.
"Of note, the University of Illinois is rated significantly higher than the state of Illinois [at A-minus], based on the institution's fundamental merits and credit qualities," Standard & Poor's wrote in its new report.
"We believe that UI has sufficiently demonstrated its capacity to operate as a fairly independent enterprise in a competitive market, with a lack of precedent in terms of governmental intervention or control and favorable reserves that would allow UI to continue to pay debt service in case of a significant delay or reduction in state appropriations," the agency added.
The school credit benefits from strong state support, a prominent research position with $1.1 billion spent last year, its flagship position, stable demand, strong fundraising, and a substantial endowment of about $1.8 billion.
The university's credit is challenged by constrained state support, high debt levels and low financial resource ratios for its rating category, but maximum annual debt service levels are manageable and the debt repayment schedule is front-loaded, Standard & Poor's said. The university has about $1.8 billion of debt.
The university's state relationship drove a previous one-level downgrade of its rating from Moody's but it's fared better than the state's other public universities that took deeper credit hits over the last two years. It relies on the state for nearly 32% of operating revenues including $663 million in fiscal 2014. The state owes the school about $378 million but that marks an improvement over a year ago this time when the figure was $501 million.
The school serves more than 74,000 students at its three campuses in Urbana-Champaign, Chicago, and Springfield.
The negative outlook reflects UI's significant reliance on state funding for operations and the anticipated negative impact on the university from continued state funding delays or reductions, Moody's added.
The state's pension overhaul, adopted in 2013, includes the pension fund that covers university employees but did not include a proposal to shift responsibility for some of the state's pension payments for employees over to the university.
The school in its offering statement acknowledges the future risk, reporting that "no assurance can be given that future legislation would not require the university to assume part or all of the liability for funding its employees' pensions in the future."