Michigan State University had plenty of buyers for a bond issue that in part will finance a legal settlement for the Larry Nassar sexual abuse cases.
Last week's deal priced amid headwinds that ranged from the stain the sex abuse case created for the university's reputation to rating downgrades and news of a coming second wave of lawsuits.
Nassar, a team doctor for the university, sexually abused student-athlete gymnasts. Officials at the university and USA Gymnastics, which also employed Nassar, have come under fire for letting it happen over many years.
The university sold $323 million of taxable bonds to fund the settlements, with the yields landing at wider spreads relative to similarly rated universities that sold taxable bonds last year, MMA data showed.
The $292 million tax-exempt piece for $292 million that will finance construction of classroom and research buildings landed at spreads comparable to the last tax-exempt deal MSU sold in 2015, despite recent downgrades.
Mark Haas, the university's treasurer and vice president for finance, said MSU was pleased with the results on both pieces with the deal oversubscribed on orders. “The pricing reflected our solid AA credit ratings and investor confidence in our institution’s financial strength,” Haas said. Bank of America Merrill Lynch and Citi underwrote the deal.
Tom Kozlik, an independent analyst, said he didn't see a penalty in the tax-exempt pricing despite the negative outlook both Moody’s Investors Service and S&P Global Ratings both assign to Michigan State. Moody’s rates the bonds Aa2 and S&P rates the bonds AA. Both rating agencies downgraded the school one notch following news of the settlement last year.
The 25-year tax-exempt maturity in the deal landed at a 3.36% yield with a coupon of 5%, for a 29 basis point spread to the Municipal Market Analytics' scale. MSU’s 2015 bonds with a similar 25-year maturity and same 5% coupon landed at the spread even though the bonds are now lower rated. Some spreads were tighter.
The preliminary pricing wire on the taxable bond maturing in 2048 offered a yield of 4.5%, a 147.7 basis points spread to a comparable U.S. Treasury, according to MMA's data.
In March, Morgan Stanley priced $101 million of taxable revenue bonds for Rutgers University. The 30-year bond offered a yield of 4.1% and a spread 45 basis points lower than Michigan State paid. Rutgers, the state university of New Jersey, is rated Aa3 by Moody’s and A-plus by S&P. Fitch Ratings rates the school AA-minus.
A 32-year taxable revenue bond priced by Morgan Stanley for California State University in July offered a yield of 4.24% and a spread 17 basis points lower than Michigan State's. Cal State is rated Aa2 by Moody's and AA-minus by S&P.
“The magnitude in actual costs to the school and headline risk would probably be considered higher than investors are used to seeing historically, in this case compared to others' situations,” Kozlik said. “Michigan State is still a prominent higher ed institution that draws some of the highest tier students and faculty. It is one of the schools that almost all Michigan and many students in the Midwest U.S. want to attend. I really would not expect any type of penalty unless metrics like attendance or applications start to trend lower. And, right now I do not expect attendance or applications to trend lower.”
Kozlik said he has not seen and did not expect secondary activity to be volatile because of uncertainty from the potential for additional legal activity.
“The market will monitor the size of the liability in the potential second wave for sure,” Kozlik said. “But I do not think that the spreads or pricing will be impacted unless there is a rating downgrade or changes in student interest in the school fall.”
The university's trustees approved the $500 million settlement and related bond sale in June. More than 300 girls and young women sued the university for failing to act against Nassar for sexually abusing them. Nassar was sentenced in January to between 40 and 175 years in state prison after pleading guilty to counts of criminal sexual conduct.
Moody’s said the university’s substantial financial reserves, continued strong philanthropic support, liquidity and its status as the land-grant university support MSU’s continued good strategic position as it faces the possibility of additional claims not included in the settlement.
“The risks associated with these additional claims are not included in a completed settlement payment, but the university favorably does have $75 million in dedicated litigation reserves for these claims, partially mitigating additional financial risks,” Moody’s said.
Another 160 Nassar survivors that were not part of the original settlement are seeking remediation from the university, according to several reports.
“MSU is bonding already for the full amount, which includes the $75 million that was set aside for the second set of lawsuits,” said Heather Young, a MSU spokesperson. “Additional bonding is not needed.”
Weeks before marketing the bonds, the university’s interim president, John Engler, who was hired to navigate MSU through the crisis, resigned following remarks he made about the Nassar victims "enjoying the spotlight."
