Case Study: Seattle University navigates challenging market environment in successful $60 million bond issuance
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Coming into 2020, Seattle University’s financial leaders knew they needed to raise funds to support completion of a major campus project. What they didn’t know was:
- The COVID-19 pandemic would upend credit markets, creating a non-trivial possibility of limited market access and cost of capital well-above the level they expected; and
- Despite those market gyrations and ongoing credit concerns for higher education institutions, the investor response would be very positive, generating more than $1.1 billion in orders for the $60 million Series 2020 Revenue Bonds.
Following is an overview of the transaction, for which UMB Financial Services, Inc. acted as municipal advisor, followed by further details on how the transaction proceeded through difficult markets.
An overview of our collaboration with Seattle University
|Conduit Borrower||Seattle University|
|Conduit Issuer||Washington Higher Education Facilities Authority|
|Tax-Exempt Bonds||Fixed Rate Revenue Bonds, Series 2020|
|Final Par Amount||$60,000,000|
|University Rating||Affirmed at “A” from S&P (with outlook change to negative)—a vital and by no means assured outcome given the COVID-19 environment and uncertainty|
|Debt Service Reserve Fund||None|
|Maturities||May 1, 2022 to 2033 and May 1, 2039 to 2050|
|Optional Redemption||Callable at par on or after May 1, 2030|
|Municipal Advisor||UMB Financial Services, Inc.|
|Underwriter||Stifel, Nicolas & Company|
|Pricing Date||June 11, 2020|
|Closing Date||July 2, 2020|
|All-in True Interest Cost||3.678% on an average life of 22.5 years|
|New Money Component||$53 million – for completion of the on-campus Center for Science & Innovation Project (CSI), consisting of:
· $40 million of funding required to complete CSI
· $13 million of contingency funding to retain university capital reserves given the difficult, COVID-19-affected economic environment
CSI total project cost is approximately $153 million, whereby the university fundraised and will contribute approximately $100 million.
Renderings of Seattle University’s Center for Science & Innovation, courtesy of Seattle University:
|Refunding Component||$9.7 million of Series 2011 Bonds maturing from May 2022 to 2032:
· Cash defeasance / new money strategy
· The university used its own cash to purchase the State and Local Government Securities (SLGS) in the refunding escrow, then borrowed a like amount of “new money” funds in conjunction with the CSI project
· Present Value (PV) savings of more than $1 million or 10.6% of refunded par
|Pricing Period Overview||More than $1.1 billion orders received, with particular interest in the long-term bond maturities—leading to pricing negotiation that ultimately reduced the final all-in true interest cost by 11 basis points|
Seattle University is one of the largest independent universities in the Pacific Northwest, based on the number of full-time equivalent enrolled students. The university is incorporated under the laws of the State of Washington as a nonprofit institution of higher education.
The university achieved numerous objectives through the execution of the 2020 financing plan.
- First, the university secured new money capital of $40 million to complete its on-campus Center for Science and Innovation (CSI) project (total project cost of approximately $153 million).
- Further, as a contingency measure to bolster the university’s balance sheet for fiscal year 2021 and beyond, the university opted to borrow an additional $13 million, replacing accumulated capital reserves that were to be used for the CSI project.
- Finally, the university desired to advance refund the outstanding, callable Series 2011 bonds for cash flow (economic) savings—but do so utilizing tax-exempt proceeds to optimize the economic result.
Strategy and market context for bonds issuance
Through a cash defeasance / new money strategy, the university used its cash to defease the Series 2011 bonds (purchased SLGS and settled the defeasance escrow fund the day prior to bond closing) and then raised a like amount of capital as new money within the 2020 bonds to replace the cash outlay.
The university, without violating current IRS tax law (resulting from the Tax Cuts and Jobs Act of 2017), was able to save more than $1 million net present value, or 10.6%, on the refunding of $9.7 million of Series 2011 bonds.
The university was also sensitive to increase its near- to intermediate-term debt service to manage maximum annual debt service for budgetary and credit rating purposes. UMB Financial Services Inc. worked with the university to establish its preferred amortization structure combining the refunding cash flows through May 1, 2033 (maturity extension of one year) with a wraparound debt service structure on the true new money component (principal payments beginning May 1, 2039). Overall, the 2020 bonds achieved an all-in true interest cost of 3.678% given an average life of 22.5 years.
As very few “A” rated or lower private higher education institutions came to market in the months of April and May, UMB Financial Services Inc. and Stifel, as underwriter, underwent deeper pricing analysis and price discovery through the offering of the 2020 bonds. Market concerns around COVID-19—including its impact on enrollment, operations and the university’s balance sheet—required close attention to market timing, S&P credit rating strategy, COVID-19 disclosures, bond and refunding cash flow structure, investor presentation (recorded road show) and investor outreach.
Through the pricing order period on June 11, 2020, the university received more than $1.1 billion in orders. Investors showed particular interest in the 2045 and 2050 term maturities. The nearly 20x aggregate oversubscription led to pricing negotiation with Stifel to lower credit spreads between 2 (short- / intermediate-term maturities) and 25 basis points (long-term maturities).
The final all-in true interest cost was lowered by 11 basis points once final pricing was negotiated and the university verbal award was provided to Stifel knowing their commitment to underwrite.
We are committed to serving higher education institutions nationally to maintain their continued financial strength and assist institutions to achieve their growth aspirations. UMB Financial Services, Inc. municipal advisors are well-equipped to assist in the P3 legal review and financial modeling process to help find a quality path forward during these complex conditions. Contact us to connect with a municipal advisor team member.
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