The Trustees of the California State University plan to issue about $346million of insured system-wide revenue bonds today, following a downgrade yesterday fromStandard & Poor's.
It will be the first of several large deals California will see in coming months and mayoffer clues as to how investors will react to future debt sales in the high-income taxstate, according to one municipal market participant.
"As the first big deal of the year, this will be a bellwether for how much Californiapaper in general will be stigmatized by the massive headline news about the state" andits budget shortcomings, said Rich Ciccarone, managing director of McDonnell InvestmentManagement. "Around the country, everyone knows about California, and whether it's a[budget] shortfall of $20 billion or $35 billion. Everyone knows it's a major problemthe state has to fix, which will need tax increases and spending cuts."
The university plans to take retail orders today ahead of pricing tomorrow - one daybefore Gov. Gray Davis proposes his fiscal 2004 budget and outlines how he intends toclose a multibillion-dollar budget gap.
Standard & Poor's downgraded the underlying rating for the system-wide revenue bonds toA from A-plus, on par with a recent downgrade of California's general obligation debt.It also revised the outlook on the trustees' debt to stable from negative.
The downgrade reflects the system's dependence on the state for operating support andalso California's worsening financial condition, analysts said in a report.
The state's financial troubles could mean deeper spending cuts for the university systemin the future. But the stable outlook anticipates that the system has adequate resourcesto cope with possible reductions in state support and still remain at this rating level.
"I'm not surprised by the lowering of the rating by Standard & Poor's," said TerryGoode, senior municipal credit analyst at Wells Capital Management. "The credit is stillfairly solid but there is definitely increased risk due to problems at the state level.They do have some rate flexibility to offset declines in state support" because thesystem's fees have remained relatively low.
Moody's Investors Service assigned a Aa3 to the upcoming deal with a negative outlook,revised from stable.
"The outlook is due to the pressures the state is facing and the likely impact on theuniversity's appropriations over the next several years," said Susan Fitzgerald, asenior vice president at Moody's. But the university's rating is higher than the state'sGO debt - A1 - because the upcoming bonds are secured by a wide variety of fees paid bystudents in the 23-campus system, including housing, parking, student union, andcontinuing education fees.
"CSU has one of the strongest student market positions of universities across thenation," she said. It has grown nearly 13% in the last five years and the number of highschool graduates in the state is projected to increase 13% in the next decade.
CSU also has the distinction of being the nation's largest higher education system.
Fitch Ratings does not rate the deal.
Financial Guaranty Insurance Co. will insure the bonds, providing them with a triple-Arating in addition to the underlying ratings.
Though the state's current fiscal condition remains of considerable interest to ratingagencies and bond insurers, "we believe a combination of the strong enrollment growth,the low fees within the CSU, and the speed with which the Board of Trustees implementeda mid-year fee increase illustrates the strength of the CSU," said Richard Leffingwell,the university's senior director of financing and treasury. "The rating agencies alsorecognize these strengths and we believe that buyers will also."
Last month, following news of a possible $60 million mid-year budget cut, trusteesincreased student tuition 10% to 15%. Tuition is not pledged to bonded indebtedness.
Proceeds from this week's sale will finance five housing projects, as well as foodservice, radio station, and continuing education facilities.
The system does not anticipate any matching funds from the state for these projects,though it is in line for hundreds of millions of dollars from a recently approved GOmeasure.
The system has no definite plans for more bond sales but is always evaluating projectsthat could first be funded with commercial paper, Leffingwell said.
Lehman Brothers will senior manage the bond sale. Orrick, Herrington & Sutcliffe is bondcounsel. The system's financial adviser is Kelling, Northcross & Nobriga.
