The University of Michigan’s upcoming $2.1 billion new money and refunding issue marks two firsts for the state flagship school as it offers both a century bond and green-designated paper.
The series that include a taxable $1.2 billion century bond and $300 million of taxable green bonds could begin selling as soon as next week depending on market conditions.
The 100-year bonds will “lock in historically low interest rates…to provide the university with a quasi-permanent source of capital,” Chief Financial Officer Geoffrey Chatas told board regents at their February meeting.
“Regardless of what the market does in the near term, we know that our capital construction needs will only continue to grow. Prefunding those capital needs now and changing our internal lending structure will ensure rate stability for years to come, regardless of what the market does,” Chatas said.
The green-designated bonds represent “our commitment to the market to use the proceeds to fund environmentally sustainable capital projects for the university,” Chatas said.
The proceeds will fund projects that “advance the university’s commitment to de-carbonation and its goal of achieving carbon neutrality by the year 2040,” reads an investor presentation. Projects in line for funding include a clinical inpatient tower, a new pharmacy building, a housing facility, a recreational facility, electric buses, a revolving energy fund, and a geothermal facility.
Kestrel Verifiers provided its certification that the spending plans meet ICMA Green Bond Principles.
Barclays is lead book runner and Loop Capital Markets is joint book runner on the century bond and $300 million taxable green bonds with six firms rounding out the syndicate. The century bonds mature in April of 2052 and 2122 and the green bond maturity was not yet determined.
Goldman Sachs is lead book runner and Siebert Williams Shank & Co. is joint book runner on another series of taxable paper for $582 million. Another seven firms round out that syndicate. The series will advance refund debt from 2014, 2015, and 2017. The bonds mature from 2024 to 2047.
Siebert is sole manager on the only tax-exempt series, $55.2 million to current refund 2012 bonds in connection with a scheduled mandatory tender. The bonds mature from 2023 to 2033.
Miller Canfield is bond counsel.
Ahead of the sale, Moody’s Investors Service and S&P Global Ratings affirmed the school's triple-A ratings and stable outlooks. It has $3.2 billion of debt.
"The stable outlook reflects our expectation that UM will sustain its strong student demand, exceptional research, and adequate financial operating performance while maintaining financial resources superior to those of peers with a manageable debt burden," said S&P analyst Jessica Wood.
While the school’s finances remain healthy, UM heads into the market
“We view governance risk as elevated following several recent high-profile scandals,” S&P said. “We believe that management and the board acted promptly to address these issues, and they do not appear to have jeopardized UM's demand or enrollment, fundraising, or academic operations at this time. We will continue to monitor how UM handles these matters and proactive steps taken to prevent future such issues.”
The university reports in the investor presentation its $490 million proposed sex-abuse settlement reached through federal court mediation in January with 1,050 claimants who alleged they were abused by now deceased Dr. Robert Anderson.
Anderson was director of the UM’s health service and was a physician for several school athletic teams from 1966 until he retired in 2003. The claimants will receive $460 million to resolve their claims and $30 million is reserved for future claims.
Other claims remain pending and the university said in the offering documents it is working to resolve them and is “of the opinion that these claims will not have a material adverse effect on its financial position.”
The settlement will be paid from university reserves and insurance proceeds.
Also in January, the university removed its president Mark Schlissel over an alleged inappropriate relationship with a university employee. A presidential search committee has been established to find permanent replacement.
UM’s deal marks the latest in a new wave of 100-year issues to kick of 2022 as universities try to beat federal fund rate hikes anticipated this year that are expected to push interest rates higher.
Double-A rated
CreditSights had placed a market perform on the issue and MSU’s bonds, viewing the credit as strong due to MSU's wealth, liquidity and demand despite the university's own sex-abuse scandals and weak demographic trends, but the structure only appeals to certain investors.
“The extreme duration of MSU’s new bonds exposes holders to significant price sensitivity which will limit potential buyers,” CreditSights said in a special commentary on the deal authored by John Ceffalio, senior municipal research analyst, and Patrick Luby, senior municipal strategist.
Claremont McKenna College in California, rated Aa3 by Moody’s, sold a $300 million century in January at a 3.775% interest rate that was a 160 bp spread to the 30-year Treasury. MSU is rated Aa2 by Moody's and AA by S&P.
The University of Minnesota board in February approved the school’s first century bond. The double-A rated school is expected to price the $500 million issue in the spring.
Such long-dated structures are typically limited to either highly rated universities or ones with a long history and expectation they will remain intact for a long time to come. The low interest rate environment and a healthy taxable market drew universities to the structure before the pandemic.
“We saw a lot of century bonds in 2019. We have not seen much in 2020 and 2021,” S&P higher education analyst Jessica Wood said in a recent interview.
Five universities issued century bonds in 2019: the University of Pennsylvania, the University of Virginia, Rutgers University, Georgetown University, and the University of Pittsburgh.
In a 2019 report, Moody's noted that for several universities the century bond structure represented a credit positive because the proceeds help with capital planning and investment over long-term horizons but they carry risks locking universities into long-dated contractual arrangement with costly restructuring and refunding provisions from make-whole call provisions.
The Michigan State bonds are being issued under a trust agreement that provides future flexibility on security through a springing provision that enables the university to release non-tuition general revenues in the future, subject to a maximum annual debt service test. The additional flexibility only occurs after all parity bonds are paid off or defeased.
“The university's strong budgetary and strategic planning framework and proactive treasury management have successfully steered the university, including its large academic medical center, through a period of fiscal and operational uncertainty related to the coronavirus pandemic,” Moody’s said.
Challenges include a rising debt load and extensive capital program and reliance on patient revenue that exposes the university to healthcare-related pressures.
The Big Ten university had an enrollment of 65,000 last fall. In addition to its flagship Ann Arbor location, it operates campuses in Flint and Dearborn.
