The University of Akron in Ohio is eliminating its outstanding student housing lease revenue debt in a bid to level its debt service and better manage operations as it deals with ongoing enrollment declines.
The university will price a $70 million of bonds on Wednesday. Roughly $12 million of taxable bond proceeds will refund the lease-revenue debt and $50 million in tax-exempt bonds will be used to refund other debt it issued in 2010.
Chief financial officer Nathan Mortimer said the move would generate roughly $15 million in savings.
“Eliminating the lease revenue bonds is a way for us to flatten out the debt service curve without extending the amortization period while realizing some cash flow relief,” Mortimer said. “The refunding does save some limited interest and admin costs while it also reclassifies the lease to bonded debt.”
PNC Capital Markets is the senior manager. Calfee, Halter & Griswold LLP is bond counsel. PFM Financial Advisors LLC is the financial advisor.
General receipts bonds are special obligations of the university that are secured by a first lien on general receipts, which exclude state appropriations and donor-restricted gifts.
Student housing lease revenue bonds are secured by a master lease agreement between the university and the development finance authority of Summit County. Lease payments are an unsecured general obligation of the university The student housing bonds that are being refunded were issued in 2011 to finance the construction of a student housing facility leased from the university to the development finance authority of Summit County.
The university said in an investor presentation that the deal is structured to “level out” its overall debt profile and decrease it maximum annual debt service.
Mortimer said that the university has no plans to issue lease revenue bonds in the short-term. “If a project were to materialize at some time where that type of structure made sense, we’d certainly consider it,” he said.
Mortimer said that the cash flow relief from refinancing the lease revenue bonds improves the university’s overall operations.
The boost comes as the university continues to look for ways to better manage operations as it addresses declining enrollment. Akron's enrollment declined by 17% in fall 2018 and is still dropping. The university saw an overall 6.5% decline in enrollment this fall.
The university is subject to a state-imposed tuition guarantee program that essentially lock -in students' tuition, fees, and room/board for four years, limiting the university's ability to price according to market conditions.
“These enrollment losses, coupled with implementation of tuition guarantee program, will continue to drive declines in net student revenue, which accounts for about 55% of total operating revenue,” according to Fitch Ratings.
Moody’s Investors Service and Fitch assigned ratings of A1 and A-plus, respectively, ahead of the sale. The outlook from both is stable. The university has roughly $341 million of outstanding debt.
“We expect the university to sustain its strong operating performance through effective budget management, even as revenue challenges persist,” said Moody’s.
The university has reshaped program offerings to focus on areas of academic strength and regional demand, while tightening admissions to drive better retention and student outcomes. It is phasing out nearly 20% of its degree offerings with low demand over several years and investing instead in higher-demand programs that it believes are better aligned with core academic strengths and regional needs.
In fiscal 2018, the university generated total operating revenue of over $388 million.
