DALLAS -- Ohio State University hits the market this week with its first sale under a $1 billion borrowing program that will use an offering statement style novel to the municipal market.
The plan allows the state's flagship public university to enter the market over a 16-month period with multiple issues under a single offering document with a supplemental bond document offered for each series.
The design – which gives the university structuring flexibility -- closely mirrors a corporate shelf registration program, allowing the university to move more nimbly when attractive market opportunities arise.
The university's initial offering is sized at $600 million of new money with another $30 million refunding series planned.
The school published a "base" offering statement and a supplement was also released related to the individual series.
The "base" document serves as a template and will address the "mechanics and security features applicable to all program bonds" and allows for flexible structuring that includes fixed-and floating-rate and tax-exempt and taxable structures, according to an investor presentation.
"Each supplemental official statement will address the specific features of the particular series being offered," the presentation said.
The arrangement permits a single offering document to be filed permitting the issuance of bonds over time and in multiple issues. Under the OSU program the university has fulfilled registration requirements with regulators on $1 billion of bonds that can be sold until June 30, 2017.
"Shelf registration is quite common in the corporate marketplace, not so much in the muni space," said Michael Papadakis, deputy chief financial officer, treasurer and vice president of Financial Services & Innovation at OSU. "It will allow us to move quickly and come to market when needed for capital projects moving forward. The documents will allow us to decide on the fly whether we'd like to issue taxable, tax-exempt, fixed or floating, senior or subordinated."
The deal is expected to price on Wednesday or Thursday.
The university is offering $600 million of taxable securities while the refunding series for $30 million is tax-exempt.
Papadakis said the university felt comfortable with current and historically low taxable rates and wanted to take advantage of them with a larger first tranche.
"Our current plan is to spend down the dollars raised in this issuance over the next two to three years," he said.
"These public shelf registration bonds are rare, typically because they work better as taxable than tax-exempts," Matt Fabian, a partner at Municipal Market Analytics, said in an email. "But for a university like Ohio State, their taxable and tax-exempt spreads will be tight enough to make a flexible, taxable program like this more interesting. Another interesting point in this: many direct bank loans can and are structured similar to a shelf program, giving the borrower flexibility to issue only as needed for one or more projects. So, to the extent we see more of these, it could be a mix of tight tax-exempt/taxable spreads and the influence from or competition with the direct placement market."
OSU is following the path of many higher education institutions that are issuing taxable bonds because spreads between taxable and tax-exempt are so tight and forgoing the tax-exemption frees them from having to abide by Internal Revenue Service rules on private use and reporting for tax-exempt bond proceeds.
Moody's Investors Service, Standard & Poor's and Fitch Ratings affirmed Ohio State's ratings of Aa1, AA, and AA respectively.
"The long-term 'AA' ratings reflect our view of OSU's extremely strong enterprise profile and very strong financial profile, which leads to an initial indicative stand-alone credit profile rating of AA-plus," said Standard & Poor's analyst Ken Rodgers. A higher-than-average debt burden and lower available resources to debt ratios compared with medians for the rating category and peer comparisons led S&P to the AA rating, he said.
The bonds are secured by a first pledge of and lien on the general receipts of the university and a debt service fund. General receipts consist of all revenues received by the university from student charges, all unrestricted grants, gifts, donations and pledges, as well as bond proceeds.
Specifically excluded from general receipts are state appropriations unless authorized by law and any restricted grants, gifts, donations and pledges.
The new money will fund a variety of capital projects on the university campus, including a medical center, academic center, student life, infrastructure and athletics projects.
The $30 million series will refund 2005 bonds and is expected to "generate very significant annual interest rate savings for the university over the remaining life of the bonds," said Papadakis.
The two leads on the deal are Barclays & RBC Capital Markets, with another six firms rounding out the syndicate in co-senior and co-manager positions.
Bricker & Eckler LLP is bond counsel. Tucker Ellis LLP is general counsel to the university and Hunton & Williams LLP is underwriters' counsel.
Ohio State University is recognized for a top-rated academic medical center and a premier cancer hospital and research center.
The university is the state of Ohio's flagship and land grant university and a member of the Big Ten Conference.
There were almost 60,000 full-time equivalent students in fall 2015 and total annual operating revenue of $5.5 billion.
Enrollment has grown slightly over the past five years primarily due to the increase in non-resident undergraduate students. Non-resident undergraduate full time students have grown 44% to almost 10,000 in fall 2015, more than offsetting the 5% decline in undergraduate students from Ohio and the 4% decline in graduate students.
The university is also one of only 41 National Cancer Institute-designated Comprehensive Cancer Centers and one of only four centers funded by the NCI to conduct both phase I and phase II clinical trials. Medical center revenue rose 11% in FY 2015.
On the academic side, increases in select student charges have more than compensated for cuts in state aid and support from the endowment has grown over the past five years. However, the university is still operating at a small deficit.
Moody's said that the continued expansion of nonresident enrollment and completion of the North Residential District housing will provide opportunities to increase revenue despite keeping in-state undergraduate tuition flat.
In addition, through his five-year 2020 Vision for Ohio State, its president has set a target of generating $400 million in efficiencies and innovative funding.
Moody's assigns a stable outlook.
"The outlook is stable reflecting our expectation that the university will continue to closely manage operations while providing a vital role in the state of Ohio's higher education system. We expect that the sizeable health care operations will benefit from Medicaid expansion," Moody's said.
The university's balance sheet reserves are expected to continue to provide a strong financial cushion for operations.
Fiscal 2015 cash and investments were a substantial $3.9 billion, roughly three-quarters of annual operating expenses. These reserves have increased 66% since fiscal year 2011.
