Northern Illinois University will issue $62 million of Series 2024 certificates of participation to finance energy-saving projects affecting roughly 50 buildings, or half of all campus infrastructure.
It does so after Moody's Ratings on Oct. 28 revised the public university's outlook to negative from stable and rated the Series 2024 COPs below investment-grade at Ba1.
The lead manager on the deal is Piper Sandler. Co-managers are Backstrom, McCarley, Berry & Co. and Estrada Hinojosa.
The university had $257 million of debt outstanding as of June 30, 2023, and Moody's said NIU's plan to take on more debt amid weakening operating performance "will further strain the university's leverage profile."
"The university currently has minimal cushion to absorb the new debt service if challenges arise," Moody's said in its rating action, noting that weaker-than-expected financial results in fiscal 2023 were followed by significantly weakened operating performance in fiscal 2024.
"We assess historical operating results against budgets, against projections and that sort of thing," said Michael Osborn, vice president and senior credit officer for public finance at Moody's. "We expected slightly better results than what were reported … and that resulted in an elevated use of their cash."
Osborn said compensation accounted for the majority of the expense pressures facing the university and was the primary driver of expense growth.
"And what you don't have is offsetting revenue growth — the growth in student charges, the growth in state appropriations," he said.
But Moody's noted the state — which it rates A3 with a positive outlook — has a strengthening credit profile, and the university's expanded enrollment and financial aid opportunities have led to more enrollment stability.
"There is some traction on the enrollment side," said Osborn, pointing to full-time equivalent stability, greater credit-hour production and prospects for revenue growth.
NIU Chief Financial Officer George Middlemist stressed the outlook revision from Moody's wasn't based on NIU's enrollment trends or the structure of the project itself.
"It was really based on concern about our reduction over time in liquidity," he said. "We share this concern. We've been taking pretty significant steps. … We're in the process of getting to a balanced budget and expect that [process] to continue."
The university's projected deficit for fiscal 2025 is half of the previous year's, he said, with the actual deficit in 2024 at just over $30 million.
"We plan on having a balanced budget by 2026, which will allow us to build up our cash surpluses," he said, adding the university has a "real robust" strategic enrollment plan and is leveraging scholarships strategically even as it right-sizes its expenses — potentially shrinking its footprint through shared offices, for example.
"We did have lots of conversations with Moody's and also with the bond insurer, Build America Mutual, and BAM did find the plan to be credible, they were willing to insure the bonds," Middlemist said. The COPs will carry BAM's GreenStar designation.
The debt was necessary to address the university's aging, energy inefficient infrastructure, he said.
NIU identified 50 buildings that could stand to shrink their carbon footprints, and the university "targeted the buildings that would have the most impact, both on conservation and energy savings," Middlemist said. "The savings have to be equal to or greater than the debt payments."
The school can track the energy savings and compare them to projections, he added. "The [energy] contractor has guaranteed those savings."
Moody's said the guaranteed savings contract and other anticipated savings should offset debt service.
Osborn noted, in the near term, Moody's will keep an eye on NIU's performance.
"We will be looking for strengthening of operating performance, fiscal alignment," he said. "They have a couple years before the energy project is put on line, so there is time to make improvements where they can, whether that's on the revenue side or the expense side."
Osborn clarified that short-term debt service shouldn't be an issue since the interest is being capitalized, so it won't become a cash-flow item for another couple of years.
Under Gov. JB Pritzker, the state has been supportive of higher education funding in the last few years, Osborn said. And Middlemist said the state legislature is currently considering a funding bill that would change the formula for higher education funding.
"NIU would benefit from that change," he said.
The university also just received the largest donation in its history, a $40 million gift from the Baustert Family Foundation for a health technology center, he noted.
"We're navigating similar waters to the rest of higher education," Middlemist said. "We have new fiscal realities. … There are lots of things that we can do as a society to help advance lives, and higher education is part of the toolkit."
