University of Nebraska refunding marks shift in debt management
When the University of Nebraska Facilities Corp. prices $550 million of bonds Thursday, it will use the lion's share of proceeds to refinance and restructure outstanding debt issued under a master trust indenture.
The move will allow the university to shed the indenture and streamline future debt issues under the facilities corporation. The borrowing structures allow the university to access the bond market under Nebraska state law that does not allow for the issuance of general obligations.
The maneuver to consolidate issuance under one structure won’t shed bondholder protections, but it will improve efficiency and cut down on costs, according to university financial advisor Janney Montgomery Scott LLC.
“We are modernizing the documents and issuing under a consolidated credit,” a Janney spokesperson said. “The source of repayment for the university’s bonds are all legally available funds of the university which was, ultimately, the same source of repayment for the MTI bonds. The primary objective of the refunding is to reduce debt service on a present value basis.”
The shift is a new way of thinking and approaching capital needs and an example of the university “trying to be good stewards of university resources and time,” said Michael Osborn, a Moody’s Investors Service analyst.
“It’s not a fundamental shift at how they will approach their capital investment strategy, it’s more about how they will finance it,” Osborn said.
The university will sell $513 million of taxable capital facilities revenue bonds to refund the remaining outstanding bonds issued under the master trust indenture, including bonds issued as recently as 2017.
The university is also pricing $37 million of new money, tax-exempt facilities corporation debt. The new money proceeds will fund various capital improvements on the university’s campuses including projects at the Munroe Meyer Institute and the East Campus Union.
Moody’s affirmed its Aa1 rating on the university's bonds and S&P Global Ratings affirmed its AA rating. The outlook from both rating agencies is stable.
Morgan Stanley is senior manager. Barclays and Bank of America Merrill Lynch are co-senior managers. Ameritas Investment Corp., D.A. Davidson & Co., Drexel Hamilton LLC, First National Capital Markets and Piper Jaffray are co-managers on the transaction.
Following the refunding, the university anticipates that all of the master trust indenture bonds will be refunded and has no further plans to issue additional bonds under the structure. All debt outstanding will be facilities corporation bonds. About $414 million of facilities corporation bonds are already outstanding, according to Moody's.
The move to consolidate its debt under the one vehicle is expected to yield more flexibility and cost savings for the university.
“The refinancing of the debt from the master trust indenture will benefit the university economically as well as allow for a streamlined credit structure,” said the spokesperson at Janney. “Under the new financing structure, the university will have the ability to come to market with less frequency and larger transactions.”
The MTI limited the university to issuing debt for specific auxiliary projects. Because it was project specific, MTI issuance often came in small amounts, with more frequency and “was somewhat burdensome for a large, Big Ten university,” Osborn said.
“So for example if the school wants to build a parking lot they issue debt specifically for a parking lot and they have the proceeds from that to pay the bonds in addition to any available funds under the MTI,” Osborn said. The move to issue debt through the facilities corporation will require fewer university resources, eliminating the need to issue debt on a project-by-project basis.
Tapping the market with larger-scale issues less frequently “means using less university resources,” Osborn said.
In addition to present value debt service savings for the university, S&P Global Ratings said the refunding will free up some $36 million in debt service reserve funds tied to the master trust indenture structures.
Osborn said issuing all debt under the university’s facilities corporation means the university will no longer be responsible for the additional costs of covering a debt service coverage ratio requirement or a debt coverage reserve fund as is required under the MTI structure.
“The facilities corporation debt does not require either of those things because it doesn’t have those sort of covenants like the MTI does,” Osborn said. “And maybe since the university is rated Aa1, it doesn’t need those requirements.”
Debt issued under the University of Nebraska Facilities Corp. is a limited obligation of the facilities corporation and is payable from university cash funds, as well as other legally available funds of the university, and is primarily used for state appropriation-backed projects covering multiple years or projects backed by multiyear gifting arrangements. All of the system's debt is fixed-rate with serial maturities.
“University of Nebraska Facilities Corporation bonds are secured by legally available funds which is just another way of saying everything that is not secured by the MTI,” said Osborn. “With this they have broadened the definition to cover the MTI pledge, to include it.”
The university had approximately $2.1 billion in legally available funds as of June 30, 2018, providing over 2.0x coverage of facilities corporation debt, according to Moody's.
For bondholders the upside is that the move “refunds debt taken out by indentures supported by revenues tied to projects at one of the four campuses and replaces it with debt backed by a systemwide pledge,” said Howard Cure, director of municipal bond research at Evercore Wealth Management.
The university campuses are its flagship campus in Lincoln, the University of Nebraska at Omaha, the University of Nebraska at Kearney and the University of Nebraska Medical Center. The Omaha campus is the second-largest university in the state.
“Since it’s taxable, the university now has more flexibility in terms of how it uses the proceeds,” Cure said. “And bondholders should find the systemwide pledge under the new structure more attractive because it has the flagship as part of the pledge.”
In Nebraska, state funding still accounts for a larger share of the funding for public higher education than revenue generated through tuition and fees.
The university has by and large escaped some of the demographic challenges other universities in the Midwest face that have limited tuition revenue and growth.
Osborn said that the university benefits from a fairly supportive state but softness in state revenues has put pressure on state appropriations the university can rely on. State appropriations have rebounded and are expected to increase 3% in each year of the next biennium.
The university’s state funding increases come on the heels of multiple rounds of cuts. In fiscal 2017, the university weathered a mid-year budget cut of approximately $13 million. Operating appropriations also decreased 2.1% in fiscal 2018 and approximately 1% in fiscal 2019.
The university responded by instituting various expense reductions. In addition, tuition increases of 5.4% in 2017-2018 and 3.2% in 2018-2019 also helped to offset the declines in appropriations.
“Some campuses will suffer more than others,” said Osborn. “The medical campus is doing well and the Omaha and Lincoln campuses are doing quite well. The Kearney campus is sort of their regional campus, mostly commuter, and that can be more exposed to demographic trends in the economy.”
The university reports enrollment of more than 51,000 on its four campuses and a more than $2.6 billion budget.