UT System refunding will break higher-ed deal drought in Texas

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After a drought of bond issuance for higher education in the Lone Star State, the University of Texas System will prime the pump this week with $386.8 million of revenue refunding bonds.

The UT System has not issued bonds since October 2017. Statewide, only three higher education issues totaled $184 million in 2018, down from $5.1 billion in 2017, according to the data collection firm Refinitiv.

Even with the upcoming issue, 2019 does not promise a strong rebound from last year’s low.

“The system anticipates a refunding of commercial paper later this fiscal year depending upon market conditions,” said Terry Hull, UT System associate vice chancellor for finance.

The upcoming bonds, rated triple-A by three ratings agencies, will be issued for savings, Hull said.

“Given the UT System’s outstanding credit quality, we expect strong demand from a variety of investors, both retail and institutional buyers,” Hull told The Bond Buyer.

The retail order period on Tuesday will be followed the next day by institutional orders.

Lead bankers for book runner Morgan Stanley are managing director Eric Wild and executive director Blaine Brunson. The system acts as its own municipal advisor.

The size of the offering could change based on market conditions, Hull said.

UT System has $10.7 billion of debt outstanding, which includes $6.48 billion of Revenue Finance System bonds. UT also issues bonds backed by the state’s Permanent University Fund, or PUF, that also covers Texas A&M University debt.

RFS debt is backed by all legally available revenues and fund balances of the UT system. Specifically excluded from the pledge are state appropriations, the Available University Fund, which consists of income from the PUF, and the income or corpus of the Permanent Health Fund.

UT System benefits from substantial endowments, including a two-thirds share in the $22 billion PUF.

“These endowments are not generally pledged to RFS bonds and are not included in balance sheet ratios,” wrote Fitch analyst Susan Carlson. “However, they provide the university with significant financial flexibility and balance sheet strength.”

With its combined endowments topping $31 billion at the end of 2018, the UT System surpassed Yale University, trailing only Harvard as the most-endowed university in the U.S.

In addition to the PUF and the Permanent Health Fund, the system manages the General Endowment Fund and Separately Invested Funds. The revenue generated from selling the land’s oil and gas flows directly into the Permanent University Fund and is then distributed to UT and A&M institutions across the state at a rate set by the UT System Board of Regents.

About 5% of the PUF distributed to the universities each year is known as the Available University Fund. The Long Term Fund is exclusive to the UT system and includes 13,600 privately raised endowments established by donors.

With 14 institutions across the state, the UT System confers more than a third of the state’s undergraduate degrees, educates about two-thirds of the state’s health care professionals annually and accounts for almost 70% of all research funds awarded to public institutions in the state.

The UT System’s operating budget for FY 2019 is $19.5 billion, including $3.6 billion in sponsored programs funded by federal, state, local and private sources. With more than 21,000 faculty and nearly 85,000 health care professionals, researchers, student advisors and support staff, the Austin-based UT System is one of the largest employers in the state.

“The complexity of the system's operations and investment portfolio highlights the need for sophisticated investment management and strong oversight,” said Moody’s analyst Susan Shaffer. “The University of Texas Investment Management Company (UTIMCO), with ultimate oversight provided by the Board of Regents of The University of Texas System, oversees the long-term investments for the system and the PUF. The returns on the endowments, including the PUF, were both over 9% for the year ended Aug. 31, 2018.”

The system’s six-year capital plan through 2024 totals $4.7 billion, of which it plans to fund almost $2 billion from its own operating funds. Fiscal 2018 total cash and investments of $47 billion cover total debt of $10.5 billion, according to Moody’s, representing a pledged revenue ratio of 4.4 times debt.

RFS debt excludes $1.4 billion in Tuition Revenue Bonds, which were approved by the Texas Legislature and covered by the state. An additional $2.5 billion, 27% of long-term debt, is funded by PUF revenues.

“Given the immense scale of the system, debt to cash flow of 3.2x is slightly stronger than peers, and debt to revenue of 0.5x is in line with peers,” Shaffer said. “The system has no near-term plans for additional new long-term debt plans beyond refunding of commercial paper or existing long-term debt.”

One of UT’s recently announced projects on its flagship Austin campus will bypass the traditional bond market.

A $338 million basketball arena replacing the Frank Erwin Center will be privately financed in exchange for revenue from events at the on-campus facility over 35 years, UT Regents announced in December.

The California-based Oak View Group will build and manage the 10,000-seat venue under a 35-year contract with the university. Oak View will sell naming rights and collect revenue from concerts and other events after the opening in 2021.

UT-Austin President Greg Fenves said the public-private partnership was the first of its kind.

The 41-year-old Erwin Center will be removed to make room for expansion of UT’s Dell Medical School on the southern edge of the main campus.

UT Austin is also planning a $175 million redevelopment of the south end zone section of Darrell K. Royal Memorial Stadium, where the UT Longhorns play football. The project is expected to be funded primarily through gifts.

Seventy miles to the south, UT San Antonio was awarded $70 million to expand its downtown campus. A National Security Collaboration Center and a School of Data Science will be added.

In the Texas Legislature, lawmakers are considering House Bill 103, authorizing a law school at the remote UT Rio Grande Valley campus in far south Texas. Approved by the state House, the bill still must be approved by the Texas Senate and by Gov. Greg Abbott before the end of the current regular session May 27, 2019.

In the north Dallas suburb of Richardson, UT Dallas is adding science and engineering buildings as private developer open a mixed-use development called Northside that adds 900 beds for students on campus. At the same time, Dallas Area Rapid Transit is planning a station near the campus for its $1.3 billion Cotton Belt commuter rail line expected to begin service in 2022.

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Primary bond market Higher education bonds Revenue bonds Refunding bonds The University of Texas Board of Regents Texas
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