Bonds

University of Minnesota offers sustainability-designated bonds

On the heels of Minnesota’s recent $876 million deal, the state’s public university system heads into the market this week with a deal that offers investors a range of paper to pick from, including a sustainability-certified bond.

The Regents of the University of Minnesota will bring a $127 million refunding on Tuesday and follow with the $34 million of new money taxable securities on Wednesday. RBC Capital Markets is the underwriter and PFM Financial Advisors LLC is advising the university.

The refunding offers a mix of taxable and tax-exempts with a taxable structure being used to advance refund 2013 bonds and the tax-exempts current refunding 2010 and 2011 bonds. Both are for traditional present value savings, PFM said.

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The original bonds paid for biomedical science research facilities and were issued as special purpose revenue bonds with debt service being covered by state payments. The ratings of Aa2 with a positive outlook from Moody’s Investors Service and AA-plus by Standard & Poor’s with a stable outlook are one notch below the state’s ratings based on the pledge.

Proceeds of the new money will carry the university’s own ratings and finance the design, land acquisition, site preparation, and pre-construction of a clinical research facility at the university’s campus in Minneapolis. The issue marks the university’s first venture into sustainability bonds, according to Carole Fleck, director of debt management

The project known as the Health Discovery Hub will serve as a home for clinical trials, establish a rural clinical research health network, provide access to advanced treatments, and host a medical device test center.

The bonds carry an opinion from Kestrel Verifiers that the use of proceeds meets the International Capital Markets Association’s requirements for social and green eligibility to warrant a sustainability label.

“In Kestrel’s opinion, the bonds will finance design and preconstruction costs of a facility that is designed to robust green building standards and that will sustain a high-performing academic health system, support healthcare services throughout the state of Minnesota, and promote statewide health equity to underserved populations,” reads the opinion.

The university provides the state’s only public medical school with more than 60% of the state’s public health professionals educated there.

The land grant university — whose Gophers are a member of the Big Ten Conference — operates five campuses with a total of 65,000 students.

The university took some fiscal hits early in the COVID-19 pandemic and some of the pains are lingering, but the balance sheet remains girded by a $2.5 billion endowment and $3 billion in foundation cash and investments.

The university turned to remote learning in the spring of 2020 and implemented a hybrid in-person/remote plan for the past school year. It returned to full, in-person learning with the start of the new semester and all students must be vaccinated with faculty and staff either being vaccinated or tested regularly. The university expects residence halls and university-managed apartments to exceed a budgeted level of 95% and 90%, respectively.

The fiscal 2022 budget relies on a slight tuition hike and some increased state support, but with expenses outpacing revenues the university is relying on some use of balances and reserves, federal relief, and possibly loans “before occupancy and revenue levels can again reach normal levels,” the university said in bond documents. The university had $3.8 billion of revenues for fiscal 2020.

Federal relief has totaled $190 million with $85 million directed for student support and the other funds going to help close fiscal 2020, 2021 and 2022 shortfalls.

Ahead of the deal, Moody’s affirmed the school’s Aa1 rating and stable outlook and S&P affirmed the school’s AA and stable outlook. The university has about $1.5 billion of debt.

“The stable outlook reflects Moody’s expectations of continued favorable student demand, tuition revenue and sponsored research trends,” Moody’s said. “The outlook also reflects Moody’s expectations that UM will continue to manage through challenging conditions related to the coronavirus, mitigating fiscal impacts through appropriate budgetary responses.”

“In our view, the state appropriated tax-exempt bonds should be priced a little behind” last week’s Minnesota general obligation bonds, CreditSights wrote in its weekly new issue preview authored by John Ceffalio, senior municipal research analyst, and Patrick Luby, senior municipal strategist.

BofA Securities won the bid for the two tranches of state bonds that saw spreads to the Municipal Market Data’s AAA benchmark of two basis points to 15 bps. Minnesota Management and Budget said the true interest cost of 1.71% on one tranche and 1.49% on the second “near historic lows” for the state.

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