CHICAGO — The Board of Trustees of Eastern Illinois University later this month will sell $85.9 million of mostly taxable certificates of participation under the Build America Bond program to finance the third phase of its 14-year-old conservation overhaul, which includes construction of a new alternative energy plant.
Barclays Capital and Edward Jones are co-senior managers on the transaction that could price as soon as the week of Sept. 14, according to the Charleston-based school's financial adviser, John Vincent of John S. Vincent & Co. Chapman and Cutler LLP is bond counsel.
The deal, which will more than double EIU's debt load, is expected to include a mix of serial maturities and term bonds with the initial maturities in a tax-exempt series. The bonds are callable at par in 10 years. University officials is expecting as much as 100 basis points in savings on the longer maturities that go out to 2036 by using the BAB program, Vincent said.
Moody's Investors Service assigned its A2 rating to the debt. Eastern Illinois will have a total of $143 million of COPs and auxiliary system revenue bonds outstanding after the transaction.
The university will use the proceeds to finance construction of a new renewable energy center - a steam-powered facility powered by biomass - on its campus to replace its aging coal-fired steam plant, as well as other conservation projects that are part of its overall effort to reduce costs and upgrade its energy systems.
The debt is secured by net revenues of the university's auxiliary facilities system and student fees with a rate covenant of two times debt service coverage. Unaudited fiscal 2008 revenues of $75 million provided a 14 times coverage ratio.
The debt is also payable by state-appropriated funds and other EIU revenues, although the school does not expect to tap any of those sources to repay debt, according to treasurer Paul McCann.
"The savings we achieve through the conservation program are expected to fully repay the debt," he said.
The new plant will replace an aging coal-fired plant built in the 1920s to heat and cool the campus, and although it's been retrofitted to meet upgraded air-quality regulations, it would require significant capital investment to keep pace with improving standards. The new plant will be powered by biomass, initially in the form of wood chips, and will supply about 7% of the school's electric needs.
Moody's said the credit's strengths include a healthy market position as the regional state school serving the southeast area of the state with a strong reputation as leading educator of teachers and broad program offerings. EIU has 10,645 full-time students.
It also benefits from conservative fiscal management, with a 5% contingency fund set aside for fiscal 2010 to deal with the potential for further cuts in state aid. The school also maintains a strong liquidity position of at least $25 million - a factor made all the more important this year amid state delays in aid payments.
The university relies on Illinois for about 40% of its revenue, leaving it vulnerable to payment delays that worsened earlier this year as the state faced its own liquidity crunch. The university's payments had been up to five months late in the last fiscal year.
"Despite these delays, EIU was able to maintain positive operating cash flow and cash balances throughout the year," Moody's analysts wrote.
The university is also challenged by competition for a declining student base and a weakening balance sheet due to its foundation's investment losses of about 16% in fiscal 2009 and the increased debt load that will follow this transaction.
McCann said the foundation's losses primarily affect the school's ability to provide aid to students and not operations. "We do need the state money, but we try to be very conservative with our budget so that any delays don't impact our liquidity," he said.