CHICAGO — The University of Illinois Thursday will refund outstanding debt and raise new money for the ongoing makeover of a major student housing complex that comes as Illinois’ flagship public university has scaled back on capital plans amid ongoing delinquencies in state support.

The university’s Board of Trustees will sell about $94 million of auxiliary facilities system revenue bonds, including $82.9 million of tax-exempt fixed-rate debt and $10.8 million of taxable fixed-rate securities.

Barclays Capital and Cabrera Capital Markets LLC are co-senior managers. Public Financial Management is financial adviser on the deal. The bonds are secured by a revenue pledge from the auxiliary facilities system that includes housing, student unions and related facilities, and also by a backup pledge of tuition and fees.

The refunding will achieve at least 3% in present-value savings and the new money will provide funding for the ongoing construction costs of the Ikenberry Commons complex, according to Joda Morton, manager of capital financing operations.

The commons will house residential halls, student dining and residential programs. The 10-year project launched in 2006 is named for former school president Stanley O. Ikenberry.

“This is a core, strategic project for us,” said Doug Beckmann, senior associate vice president for business and finance at the Urbana-Champaign-based school.

Ahead of the sale, Moody’s Investors Service affirmed the Aa2 rating assigned to the system revenue bonds and Standard & Poor’s affirmed its AA-minus. Both assign negative outlooks. The university has more than $1.6 billion of rated debt.

A key challenge for the school comes from the state and its ongoing delays in forwarding aid payments as it grapples with its own liquidity woes. The problems are illustrated by the state comptroller’s recent warning that Illinois likely will close out fiscal 2011 at the end of the month owing schools, health care providers, and other contractors $8 billion.

The university received $743 million in fiscal 2010 from the state, which is currently $300 million behind in fiscal 2011 aid payments totaling $700 million. This year’s drop was due in part to the end of stimulus-related funds. State support accounted for 30% of fiscal 2010 operating revenues, either in direct aid or for employee benefits, according to Moody’s.

Health-care related revenues accounted for 16% of operating revenues, grants and contracts for nearly 19%, and tuition for 17%. “The university’s operating revenues are fairly diverse in our view,” Standard & Poor’s analysts wrote, “This is a characteristic of flagship public research institutions and we consider it a credit strength.”

While the school’s diverse revenue streams and liquidity have helped it weather the payment delays, those delays have had a widespread impact on planning and operations, according to Beckmann.

“This has been building for about five years and so in looking ahead we were adjusting with expense controls,” he said. “In general, we’ve slowed down capital expenses like some remodeling projects and discretionary projects and equipment purchases.” The university has in recent years frozen salaries and raised tuition.

Moody’s last year downgraded five Illinois state universities, and placed them and two others on negative watch due to the impact of the state’s delinquencies and concern over possible state funding cuts.

The University of Illinois escaped any negative action, with the exception of being assigned a negative outlook. The other schools have since come off Moody’s negative watch but retain negative outlooks.

Moody’s said the Big 10 athletic conference member’s rating reflects its strong market position in student demand and health care, its nationally prominent research, good liquidity, and adequate debt service coverage. It’s among the nation’s top research universities, with nearly $900 million in such funding last year.

The negative outlook reflects ongoing concerns over state delays and funding cuts “that could reduce the university’s operating flexibility as it uses its existing liquidity to fund the unpaid receivables from the state, which will strain its overall operations and bring liquidity levels even lower,” Moody’s wrote.

Standard & Poor’s said: “Although the university has managed its cash flow successfully to date, continued state disbursement delays that negatively impact operations, vendor payments, or ability to cover debt-service payments would have a negative impact on the rating.”

In addition to the risks posed by state delays, the university is challenged by market risks from its outstanding floating-rate portfolio, exposure to health-care sector risks from its medical center, and limited expendable financial resources. Moody’s rates the university’s health care debt A1 with a stable outlook.

The university has quadrupled its debt load over the last 10 years but has limited issuance plans going forward as it slows capital spending and relies on cash and reserves to fund some projects in an effort to bolster its financial profile.

“The slowdown of debt issuance, coupled with the principal paydown of outstanding debt, should help ease the balance-sheet leverage until financial resources demonstrate growth from fundraising and positive investment returns,” Moody’s analysts wrote.

The university has about $265 million, or 16% of its debt portfolio, in a variable-rate mode that is supported by bank liquidity facilities with covenants providing for events of default that could cause acceleration of the debt. Beckmann said the school has staggered renewal dates to better manage market risks.

The university has a $27 million liability based on mark-to-market conditions on four variable-to-fixed-rate interest rate swaps with Morgan Stanley Capital Services Inc., JPMorgan Chase Bank NA, and Loop Financial Products LLC.

In addition to strong demand from students, the university’s credit benefits from a substantial endowment of $1.1 billion, though most of it is restricted; a history of fundraising, and a manageable debt burden, according to Standard & Poor’s. The school saw a sharp rise in its total financial resources by about 40% in fiscal 2010 to $2 billion due to investment income, gifts and a surplus.

The school’s main campus in Urbana accounts for 57% of the 73,000-student body, followed by its Chicago campus at 36%, and Springfield at 7%.

Tuition for fall 2010 was $14,370 for a freshman at the Urbana campus. That will increase by 6.9% in the fall. The school guarantees a four-year tuition rate.

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