DALLAS — The University of Texas System will open the New Year by selling $240 million of top-rated Permanent University Fund bonds as the 15-campus system enters an era of significant expansion.
This week's negotiated deal with JPMorgan as senior manager could come as early as Tuesday, depending on market conditions, said Terry Hull, associate vice chancellor for finance at the UT System.
"Between Tuesday and Thursday is what we're looking at," Hull said. "We expect the issue to be well received. We think the market looks favorable for a liquid, high-grade issue."
JPMorgan executive director Laura Powell and managing director James Costello are lead bankers on the deal. Bank of America Merrill Lynch is co-senior manager with a syndicate of six other firms.
The UT System does not use an outside financial advisor. Bracewell & Giuliani attorney Tim Deithloff, who earned his law degree at UT Austin but his undergraduate degree at arch-rival Texas A&M, serves as bond counsel.
With triple-A ratings across the board, the UT System debt is expected to appeal to risk-averse investors and institutions.
"That issuer is particularly high quality," said Jeffrey Timlin, lead portfolio manager and principal at Sage Advisory Services in Austin. "There's a little bit of softness in the market, but I think the deal should be well subscribed."
After 2013 gave long-term municipal mutual funds their worst year since 2008, investors will be wary in the coming year, most analysts agree. But Timlin said the weakness is more in the secondary market.
"With reduced supply, new issue demand was still fairly robust at the end of 2013," Timlin said. "It's really the secondary market that's down."
Elizabeth Foos, municipal credit analyst at Morningstar, noted that municipal bond volume was down in 2013.
"At the same time, you saw yields go up for that triple-A quality debt," Foos said. "We would expect good demand for bonds such as these."
Through Dec. 13, municipal bond funds posted negative returns of 3.658% on average, according to Morningstar Inc. Long-term open-ended muni funds posted negative returns of 4.28% through Nov. 18, which compares with gains of 10.07% in 2012.
"As the economy transitions to a higher growth channel, we expect some more pain from rising rates before valuations become attractive," Morgan Stanley analysts Michael Zezas and Meghan Robson wrote in a report previewing 2014.
The Permanent University Fund was established by the state constitution in 1876 as an endowment to support the University of Texas and Texas A&M University Systems. Both systems are authorized to issue bonds and notes payable from distributions from their shares of the PUF.
The PUF distributions are designated as the Available University Fund. UT receives a two-thirds share of AUF distributions. Distribution amounts are limited by the state constitution to 7% of the average PUF fair market value.
"The Aaa rating for the PUF bonds is driven by the substantial size of the PUF that provides ample coverage of the system's PUF debt, constitutional limits on debt issuance relative to the book value of the PUF, strong oversight and management of the PUF's complex investment portfolio, and no plans to materially increase PUF debt outstanding," said Jenny Lin Maloney, lead analyst on the deal for Moody's Investors Service.
Invested in a diverse pool of assets drawn primarily from oil and gas revenue on state lands, the PUF's market value has soared to $15.6 billion from $9.7 billion in 2009.
About 32% of the PUF is invested in hedge funds, 22% in private equity, 23% in traditional equity, 10% in fixed income, 9% in commodities and other alternatives, 3% in real estate, and 1% in cash.
Not included in the $15.6 billion market valuation are the PUF's royalty interests in oil and gas properties and the value of surface interests on 2.1 million acres in west Texas, including the oil-rich Permian Basin. A September 2013 study conservatively valued the PUF royalty interests at $9 billion, with the actual valuation estimated at much higher levels.
"There has been a significant increase in income generated from these holdings, which is expected to continue to fuel growth of the PUF beyond general market returns," Maloney said.
The UT System plans to refund up to $250 million of outstanding PUF bonds in the spring for interest savings depending on market conditions, Hull said.
"The system also expects to issue Revenue Financing System bonds later this spring to fund capital construction and to refund outstanding commercial paper," Hull said. Revenue Financing System bonds are backed by a broad pledge of system-wide revenues. The UT System issued no long-term debt in 2013.
The PUF is managed by the UT System's UTIMCO financial services company. The system provides self-liquidity for all debt programs through available operating funds and endowments as well as through a security purchase agreement with UTIMCO, according to Standard & Poor's analyst Bianca Gaytan-Burrell.
In February, the UT System's board of regents is expected to approve an increase to the PUF commercial paper program, to $750 million from the current $500 million, and rescind a $400 million PUF Flexible Notes program. The decision to increase the PUF CP program is driven by the significant growth of the PUF, according to Moody's.
"With positive operating cash flow, no swap collateral posting requirements, and managed capital calls, we anticipate the system's overall liquidity will remain adequate," Maloney wrote in her ratings report.
After this week's deal, the UT System will have about $8.4 billion of debt outstanding, including commercial paper, according to Moody's.
With a headcount of more than 213,000 students, the UT system is the largest university system in Texas and one of the largest in the U.S. with nine academic campuses and six health-related institutions.
Projects in the works include a $42 million, 93,000-square-foot addition to the University of Texas at Galveston Medical Branch research facilities. The UT Regents approved $30.5 million of PUF revenues that will be combined with $11.5 million in bonds to pay for the addition. The new addition replaces a prior research facility that was damaged beyond repair by Hurricane Ike.
Another major project nearing completion this year is the $800 million UT Southwestern Medical School's William P. Clements Jr. Hospital in Dallas. The hospital, which will be connected to the medical school, is close to UT Southwestern's other affiliated hospitals, Parkland Memorial and Children's.
In November, the UT System Board of Regents unanimously approved $265.5 million of bonds backed by the state's Permanent University Fund for several campuses including a new branch in the Lower Rio Grande Valley of South Texas.
Those bonds will be allocated later in the year for specific projects, Hull said.
The new UT Rio Grande Valley will receive $142 million of PUF bonds, more than half of the total approved in November. The new branch combines the existing UT campuses in Brownsville and Edinburg.
At the main campus in Austin, $10 million of PUF bonds will be used to design and build an annex to the current Texas Advanced Computing Center building. The PUF funding will match and be contingent upon a challenge grant of $10 million that has been offered to UT Austin.
The system is also developing the new Dell Medical School at the flagship campus in Austin. System financing of the $430 million medical school is expected to be financed with revenue finance system debt.
As 2013 came to a close, the UT System's fundraising topped $1.2 billion marking the second most successful year in UT history for overall giving.
For the past five years, the trend line has continued upward, as philanthropic support has steadily increased each year, officials said.
With a future medical school in the mix, UT Austin is raising funds at a historic pace and broke previous records last year. Among the major gifts are $50 million from the Michael and Susan Dell Foundation.
"Philanthropy is considered one of an institution's most critical funding streams," said Randa Safady, vice chancellor for external relations for the UT System. "It serves as an investment in important work that often cannot be funded with other sources."