CHICAGO - Michigan State University will enter the market today for the first time in seven years to sell approximately $80 million of general revenue bonds that will carry a coverage level of 61 times debt service.
Proceeds of the issue will be used to advance refund $14.5 million of outstanding fixed-rate student fee revenue bonds sold in 1985 and current refund about $46 million of variable-rate revenue bonds also sold in 1985, according to Alex Rorke, a managing director at Dean Witter Reynolds, Inc., the senior manager on the deal.
The issue will also provide $28 million for the expansion and renovation of facilities at the East Lansing-based public university.
Rorke said the lower fixed-rate interest rates from the refunding, which will free up reserves, combined with the university's past conservative management of its debt service and the approximately $15 million new-money component of the issue will provide the institution funding for the capital projects.
"The issue is structured so that the university can fund about $28 million in new construction without increasing the debt service budget," Rorke said.
The university's current debt service runs about $6.48 million annually, he added.
Rating agency officials noted that the university has drawn a consistent level of funding from the state of Michigan, despite pressure that the recession has put on the state's budget.
In some other states, such as Ohio and California, officials said funding for higher education was cut to help balance the state budget.
According to Roger Wilkinson, the university's treasurer and vice president for finance and operations, the university last year received 55% of its $450 million general fund budget and 35% of its $820 million all-funds budget from the state.
In the current fiscal year, which began July 1, the university's general-fund budget appropriations from the state remained constant, while the all-funds budget received a 0.5% increase.
Wilkinson said that despite Michigan's budgetary problems, "we were treated fairly."
"Gov. John Engler and the Legislature continue to make education a priority," he said, adding that the university expects to receive "fair treatment" from the state in terms of future appropriations.
Moody's Investors Service rated the general revenue bond issue Al compared to the A rating it assigned the student fee revenue bonds. Howard Cure, a vice president at the agency, attributed the higher rating to the broader pledge of revenues for the new issue, including student tuition, fees, and other unrestricted income.
The new bonds are secured by a limited obligation of the university based on the general revenues. Coverage on the 30-year bonds is 61 times debt service, according to Rorke.
Cure said that Moody's rating also reflects Michigan's ability, despite pressures due to its cyclical industrial-based economy, to maintain and increase state appropriations for higher education.
Fitch Investors Service, which rated the university's debt for the first time, assigned an AA-minus rating with a stable credit trend to the issue. Andy Matteis, a vice president at the agency, said even if state support of the university does not keep pace with inflation, the institution has "some room to raise tuition and fees."
Standard & Poor's Corp. continued to rate the university's debt AA-minus. Jennifer Neel, an associate at the agency, said the rating was given a negative outlook to match the state's negative outlook due to concerns that state appropriations could diminish if stresses on the state's finances continue.
Wilkinson said money from the issue will be used for a major addition to the College of Business, as well as the renovation of three classroom buildings and the main library. He added that the university has autonomy under the state constitution to raise fees, which it did by 11% in the current fiscal year.
"It's a very important factor in meeting our fiscal responsibility," he said.
Rorke said he anticipates strong retail and institutional interest in the issue.
"Our head underwriter is calling the deal a museum piece because the university comes to the market so seldom," he added.
Co-senior manager on the deal is WR Lazard, Laidlaw & Mead, Inc.
