DALLAS – The University of Texas System will launch the New Year by issuing $450 million of revenue bonds in two series that include taxable bonds and so-called "green bonds.".
The bonds are scheduled to price through negotiation Thursday with Bank of America Merrill Lynch & Co. and six other underwriters in the syndicate. The $250 million Series A is taxable, while the $200 million of tax-exempt Series B bonds are considered "green" because of the environmental measures used in the design and construction of the buildings.
Jeffrey Timlin, principal at Sage Advisory Services in Austin, said that turmoil in this week's stock market sparked by a sell-off in China should not deter investors seeking safety in the municipal market.
"The municipal side is showing a pretty muted response," Timlin said Monday, Jan. 4. "We had some pretty large inflows of over $1 billion last week. I would anticipate most deals to be oversubscribed."
This week's deal comes a month after UT sold $117 million of bonds backed by the Permanent University Fund, earning yields of 3.33% on 3.25% coupons maturing in 2035.
The upcoming bonds are issued through the Revenue Finance System, backed by a broad pledge of system-wide revenues. Pledged revenues exclude state appropriations and other restricted funds.
With this deal, UT System will have more than $6 billion of parity debt outstanding, according to the preliminary official statement.
Ratings analysts could see few clouds on the UT System's horizon in confirming its triple-A ratings.
"Robust financial reserves, strong central management and oversight, combined with healthy financial support from the state mitigate high exposure to healthcare revenue and ongoing capital needs," Moody's Investors Service analyst Karen Kedem wrote Dec. 17.
Standard & Poor's credit analyst Bianca Gaytan-Burrell said the system's strong performance "is countered by financial resources that are low for the rating category, as well as additional debt plans."
Fitch Ratings analyst Susan Carlson took stock of the UT System's plan to issue more than $1 billion of tuition revenue bonds approved by the 2015 Texas Legislature to finance major construction projects on the system's 15 campuses.
"UTS maintains adequate capacity to issue the additional debt associated with its substantial capital improvement plan," Carlson said. "Though approximately $2.4 billion of RFS debt or commercial paper is expected to be issued over the next six years, including TRBs, the system's fiscal 2015 pro forma debt burden remains low at about 4% of operating revenue. Fiscal 2015 operations provided ample coverage of pro forma maximum annual debt service about 3.1x."
The UT System is one of the nation's largest systems of higher education, with more than 221,000 students and more than 2.6 million patients across eight universities and six health institutions.
"Demand for UT's educational services remains strong, supported by vibrant regional demographics and a relatively low cost of attendance," Kedem said. "Total enrollment continues to increase, but some campuses face constraints related to capacity, to a portion of enrollment guaranteed admission from graduating high school in the top ten percent of the class, and to the strengthening of admissions standards at particular campuses."
With annual expenses of over $2 billion, about two-thirds of the system's research is health-related, with potential for growth following the addition of two new medical schools, one in Austin and another in the Rio Grande Valley town of Edinburg, Texas.
In fiscal year 2015, federal agencies comprised 60% of research funding, 15% from state and local governments, and 15% from private sources.
Among the projects to be funded with the green bonds are projects at the new Dell Medical School in Austin and at the University of Texas at Dallas.
The medical school is named for Dell Computer creator Michael Dell and his wife Susan; their foundation contributed $50 million in 2013. The Austin medical school is the first for a major university built from the ground up in more than 50 years, officials said.
In May 2012, the Board of Regents allocated $25 million of annual funding for the medical school, plus another $40 million spread over eight years for faculty recruiting.
In November 2012, Travis County voters approved a proposition to raise property tax revenue in support of health care initiatives for Central Texas, including $35 million annually for the medical school.
With initial funding secured, the UT System Board of Regents approved a plan in May 2013 to build research, educational and administrative facilities, as well as a medical office building and parking garage on UT Austin property. Seton Healthcare Family and Central Health also confirmed plans to build a new teaching hospital on leased university land in the heart of the burgeoning medical district.
Construction of the UT facilities began in April 2014, with scheduled completion in May, in time for the medical school's first class in June.
At the UT Dallas campus, a second phase of the Naveen Jindal School of Management will receive long-term financing through the bonds.
The $25 million addition includes classrooms, a trading lab, staff and faculty offices, computer labs, and other instructional space.
The Dallas campus is also adding a residence hall as the 47-year-old university continues to attract undergraduate students. Once a research institute for Texas Instruments, the campus was donated to the state in 1969 and began as graduate research facility. The campus now has more than 14,000 undergraduates and more than 8,700 postgrads.
Other recent developments for the UT System include plans for a larger presence in Houston, where UT operates the M.D. Anderson Cancer Research Institute.
Although several universities serve the Houston area, UT does not yet have an academic campus there.
In October, the system announced plans to explore an affiliation agreement between the University of Texas Southwestern Medical Center and Texas Health Presbyterian, a component of Texas Health Resources.
"Texas Health Presbyterian's solid brand and good financial performance mitigate some of the financial risk of a joint venture," Kedem said. "However, there are operating and cultural challenges to joining a component of a faith-based system with a component of a large public university system."
