DALLAS — In a lean budget environment, the University of Texas Board of Regents will hit the market with $700 million of triple-A rated revenue bonds this month, starting today with a $330 million issue.
The Series A deal begins with a retail order period today, followed by full pricing tomorrow. The $373 million Series B is expected to price around March 23.
“We expect a very strong market response for this deal,” said Philip Aldridge, vice chancellor for finance and business development. “The tone of the market is good, and there is a lot of demand for natural triple-A paper right now.”
The negotiated Series A deal is led by Wells Fargo Securities and Citi. Estrada Hinojosa & Co., Fidelity Capital Markets, Jeffries & Co., Morgan Keegan & Co,. and Morgan Stanley are co-managers.
The university system is its own financial adviser. McCall, Parkhurst & Horton is bond counsel. The bonds are not subject to the alternative minimum tax, according to the firm.
The bonds will be used to current refund $258 million of tuition revenue bond commercial paper notes, finance about $134 million of authorized projects, and advance refund more than $300 million of outstanding system revenue bonds. The bonds are structured as fixed-rate debt.
The deal comes amid financial strain in the Texas budget and ahead of plans for additional issues. The system expects to issue up to $400 million of bonds backed by the Permanent University Fund this summer and a larger tranche of Build America Bonds in the fall.
Despite the growing debt and current belt-tightening, the bonds retain their triple-A ratings from all three major rating agencies.
“We understand that the system has plans for substantial new-debt issuances in the next several years for its ongoing capital plan,” said Standard & Poor’s credit analyst Bianca Gaytan-Burrell.
“While this is a concern, we believe the debt level is mitigated by the system’s strong historical operating performance, large revenue base and revenue diversity, overall financial resources, steady state capital support, and still moderate debt burden,” the analyst wrote. “As such, we expect the additional debt will remain manageable relative to budget.”
The UT system is one of only two public university systems to carry a AAA from Fitch Ratings.
“The breadth and diversity of UT’s various funding streams continue to be viewed positively by Fitch and help to mitigate a decline in any single source, such as the decline in investment income which occurred in fiscal 2009,” wrote analyst Douglas J. Kilcommons. “Material credit risks remain minimal.”
Revenue financing system debt is secured by a lien on and pledge of all legally available revenue, funds, and balances of the system’s 15-member institutions. About 26% of the system’s pro forma long-term RFS debt portfolio of $4.37 billion will be classified as tuition revenue bonds. TRBs, which are issued to finance non-self-supporting academic and research infrastructure, are reimbursed by the state through annual appropriation.
Moody’s Investors Service analysts Laura C. Sander and Karen Kedem note the system still has 12 interest rate swap agreements in place with five counterparties worth $2 billion. As of Feb. 12, the mark-to-market value on the swap portfolio was a negative $8 million to the system, the analysts wrote.
“Given the system’s favorable terms under derivatives agreements, we have not factored into our analysis any potential swap-collateral posting requirements,” they wrote.
While the state’s flagship university system remains in enviable condition, it is not immune from the gathering budget crunch facing Texas.
The UT Board of Regents is meeting today to discuss plans for a system-wide budget cut of $175.3 million as part of the state’s call to reduce appropriations for the current biennium by 5%.
Gov. Rick Perry, Lieut. Gov. David Dewhurst, and House Speaker Joe Straus have asked state agencies, including institutions of higher education, to submit plans for the proposed budget cuts. The 5% cuts would be aimed at mitigating an estimated $4.3 billion budget gap in the current fiscal year, according to the state comptroller’s office.
The UT System Administration and its 15 institutions have been cutting costs for several years with ongoing initiatives such as sharing business and information technology operations, refinancing bond debt, and leveraging purchasing strength for medical equipment and supplies. Last year, the system imposed a flexible hiring freeze and senior-level executive compensation freeze.
The new budget cuts will be distributed across the institutions and the UT System Administration. Of the $175.3 million in budget cuts, $78.1 million are at the nine academic institutions and $97 million at the six health care institutions.
“While we know it will be difficult for our academic and health institutions to cut 5% of state appropriations over the biennium from their budgets, particularly in the middle of a fiscal year, we pledge to do our part to help state leaders address these continuing concerns,” said UT System chancellor Francisco G. Cigarroa.
State appropriations provide a declining share of revenue for the system, having fallen from nearly 50% in 1985.
“While this percentage of support is declining, the system has historically received good support from the state for both operations and capital needs when compared to other state universities across the nation,” according to Moody’s. “Nevertheless, state operating support is now under pressure.”
Moody’s maintains a Aa1 rating with a stable outlook on the general obligation pledge of the Texas state government. “The rating reflects a state economy with strong fundamentals that lagged other states entering the downturn,” analysts noted.
The UT system is one of the largest public university systems in the U.S., and is larger than the state’s other major system, Texas A&M. Its campuses educate about one-third of all public university students in the state.
UT has extensive research activity, operates medical schools and an academic health care system, and offers programs that include law, medicine, engineering, and business.
Fall 2009 enrollment was 202,371, with the largest number at the main campus in Austin.