The University of Minnesota is weighing a mix of maturity options as it confronts a volatile market for a $500 million sale originally planned as a century bond.
“We have the option to do all with a 100-year maturity, a mixture of shorter-term bullets and a 100-year bullet, or all shorter-term bullets,” Carole Fleck, the university’s director of debt management, said in an email. “The decision will be made prior to pricing.”
That pricing is expected early next week and depends on rates and investor interest.
The university began considering a 100-year bond in 2019 as it considered long term capital strategies.
After receiving Board of Regents approval this February, the finance team intended to follow Michigan State University, the University of Michigan, and
The university saw headwinds as it readied the sale with volatility driven by the swifter pace of Federal Reserve rate hikes now expected to combat inflation and geopolitical worries magnified by the Russian invasion of Ukraine.
Municipal
The finance team returned to the board last week for tweaks.
“Our initial strategy and discussion with our Board of Regents only focused on the century bond and the original resolution stated an interest rate cap. Due to market conditions, we wanted the flexibility to pivot to shorter-term bullets if necessary, while still remaining with our long-term strategy,” Fleck said.
Barclays is the lead underwriter. Janney is advisor and Dorsey & Whitney LLP is counsel on the taxable sale, which will feature a municipal CUSIP. Ahead of the sale, Moody’s Investors Service affirmed the school’s Aa1 rating and S&P Global Ratings affirmed its AA. Both assign stable outlooks.
The changes laid out for the board last Thursday by Myron Frans, the university's senior vice president for finance, and Michael Volna, associate vice president for finance, allow for a range of maturities, lift the cap of 4.5% on a 100-year maturity, and named Barclays as the lead.
The revised resolution also adds refinancing of existing debt outstanding as a permissible use of proceeds.
Universities' use of
The university’s consideration of the century structure picked up last summer and fall as an alternative to annual issues in the range of $80 million to $100 million annually.
“Since we expected interest rates to rise over the next few years, it made sense to lock in long-term rates now to pre-fund our six-year capital plan,” Fleck said.
The university plans to set aside a portion to invest and the investments' growth is supposed to help repay the borrowing. With the proceeds it also will establish an internal bank revolving loan program. Loans will be made to internal departments with a repayment plan and the interest collected from borrowers will repay the bond interest.
“The principal that is collected will be recycled into new loans for additional capital needs. This ‘recycling’ feature ensures original bond proceeds are used many times over, rather than just once, and acts as a multiplier of the university’s debt capacity,” Fleck said.
Where the century bond market is going this year is hard to foresee.
“Broadly it makes sense for issuers such as these well-known higher education institutions to lock in attractive funding levels in the current environment,” said Tom Kozlik, head of municipal research and analytics at HilltopSecurities Inc. “It would not surprise me to see others choose this type of strategy before rates climb. Interest rates are going higher, faster so locking in attractive pricing today makes sense.
But flexibility, such as the University of Minnesota sought from its board, might now be needed. “It is a buyer’s market currently so the bond sales may not be as easy to complete as they would have been in 2021,” Kozlik said.
Washington University in St. Louis recently included a taxable $500 million, 100-year maturity that paid 4.349% in a $1 billion sale, with the other $500 million maturing in 2054 at a 3.524% rate. Moody’s rates the school Aa1 and S&P rates it AA-plus.
Triple-A rated
“I think that the universe of potential buyers of ultra-long duration bonds is limited, and that new issue spreads can be very sensitive to deal size,” said Patrick Luby, senior municipal strategist at CreditSights. “This part of the market was certainly repriced by the Michigan State and University of Michigan deals. After widening in early March, spreads have tightened in the last two weeks, but remain much wider than where ultra-long bonds were priced prior to the Michigan deals. Yields have risen, so this much duration is certainly not for every investor.”
The ratings affirmations on $1.4 billion of outstanding debt and the new deal factored in the anticipation of a long-dated structure.
“The planned borrowing will increase leverage by a significant amount this year offset by lower borrowing anticipated in the future,” Moody’s said. “The proposed bonds will be issued with bullet maturities, a portion or all of which could be up to 100 years which will bring greater complexity to the debt profile and treasury management.”
Moody’s said the rating reflects an excellent brand and strategic positioning derived from its strong student and research market positions combined with ample financial resources and strong state support. Challenges include relatively thin operating performance compared to peers, indirect exposure to patient care revenue and a competitive landscape which somewhat dampens enrollment prospects.
"The financial profile reflects the university's relatively healthy financial performance on a cash basis while full accrual-based results typically for the four years preceding fiscal 2021 struggled to attain near break-even results,” S&P analyst Ken Rodgers said in its report.
The university, founded in 1851, is the state’s flagship public school with campuses in the Twin Cities, Duluth, Morris, Crookston, and Rochester and is a member of the of the Big Ten Academic Alliance with enrollment of 66,000. Revenues total $3.7 billion with nearly $1.2 billion of research awards for fiscal 2021.
