CHICAGO — The University of Minnesota enters the market Tuesday with $388 million of general obligation bonds to raise funds for various projects and reduce its floating-rate exposure by refunding debt.
Barclays Capital is the underwriter and Dorsey & Whitney LLP is bond counsel. Ahead of the sale, Moody’s Investors Service affirmed the university’s Aa1 GO rating and Standard & Poor’s affirmed its AA marks. The university has $1.1 billion of rated debt.
About $80 million of the sale will fund projects. The remainder will refund debt, shifting variable-rate debt to a fixed rate. The university will use cash to terminate swaps tied to the variable-rate debt being refunded.
The school’s credit benefits from its status as the state’s flagship public university, membership in the Big Ten athletic conference, and 61,000 full-time students. Its balance sheet is supported by adequate financial resources of $3 billion in fiscal 2010, up from $2.7 billion a year earlier, positive operating performance, and a well-diversified revenue base.
The university’s $2 billion of expendable resources provide 1.6 times coverage of debt service. It also boasts a strong and growing research base, with $630 million spent in fiscal 2010, up from $600 million a year earlier. The school has an endowment of $2.4 billion.
Its challenges include the risks associated with managing a debt portfolio with variable-rate debt supported by self-liquidity or standby bond purchase agreements, unrestricted resources that provide just a thin cushion for debt and operating expenses, further borrowing plans, and looming state funding cuts.
The university will lower its floating-rate exposure to about 26% of its debt portfolio with the upcoming sale, which should ease some credit concerns.
Potential state funding cuts pose a strain. Minnesota delayed about $89 million of the university’s $623 million fiscal 2010 operating subsidies, but the university’s strong financial position helped it weather the action along with layoffs and other cost-cutting measures.
The university is likely to see a reduction in its state funding in the coming years as Minnesota heads into the next biennium with a $6.2 billion deficit. The biennium begins July 1.
University’s management expects a 15% cut in state funding in fiscal 2011, reducing the subsidy level to $591 million. “Management reports that fiscal 2012 state appropriation fund amounts are highly uncertain at this time,” Standard & Poor’s wrote.
Moody’s expects the funding cuts to pressure operating performance, but said the university should be able to offset those reductions from tuition increases, growth in other revenues and expense management and reduction initiatives.
The university will further increase its leverage with plans to issue about $100 million in fiscal 2012 for projects at its Biomedical Science Research Facilities, which are expected to drive significant growth in the university’s research activities.
