University of Arizona gets negative outlook ahead of refunding deal

Bonds
The University of Arizona’s main campus is in Tucson.

University of Arizona

The University of Arizona will price a $96 million refunding of system revenue bonds after being hit with a new negative rating outlook.

The taxable bonds are pricing Wednesday and Thursday through book runner Citigroup, led by managing director Tim Rattigan and director Alex Zaman.

RBC Capital Markets managing director Kurt Freund is financial advisor, working with the university’s chief financial officer Lisa Rulney, Nicole Salazar, vice president for financial services, and Steve Kelly, assistant vice president for Treasury.

The deal includes serial bonds maturing through 2035 and term bonds maturing in 2040 and 2048.

Moody’s Investors Service revised the outlook on its Aa2 rating to negative ahead of the deal. The bonds are rated AA-minus by S&P Global Ratings with a stable outlook.

“The revision of the outlook to negative is driven by the university’s thin operating performance and reduced liquidity, providing a more limited margin to adapt to a more challenging and volatile operating environment over the next several years,” Moody’s analyst Roy Eappen wrote, citing liquidity and governance as issues in the pandemic and economic downturn.

UA has $823 million of outstanding system revenue bonds, according to Moody’s. The university also has $534 million outstanding under the Stimulus Plan for Economic and Educational Development (SPEED) program and certificates of participation.

The SPEED revenue bonds are payable from and secured by transfers of certain available state lottery funds and university funds to a “SPEED Fund” held by the state treasurer and are rated a notch lower by Moody’s. The funds are also backed by a subordinate security interest in gross revenues of the university should lottery revenues and university funds be deficient. Lottery funds have been appropriated for debt service reimbursement funds since program was authorized after the global financial crisis in 2009.

The university, which includes its flagship campus in Tucson, is still seeing enrollment growth while the value of its endowment has slipped.

“In our view, the University of Arizona, similar to other higher education institutions, faces elevated social risk due to uncertainty on the duration of the COVID-19 pandemic,” S&P analyst Laura Kuffler-Macdonald wrote. “Despite the elevated social risk, we believe UArizona’s environmental and governance risk are in line with our view of the sector as a whole.”

Proceeds from the 2020A System Revenue Bonds will pay the interest due on outstanding bonds, except for the 2018B System Revenue Bonds, on Dec. 1, 2020, partially refund the 2013A and 2013B System Revenue Bonds and pay costs of issuance.

The University of Arizona includes a medical school in Tucson and one in Phoenix. In fiscal year 2019, the university posted operating revenue of $2.1 billion and in fall 2019 enrolled 44,713 full-time equivalent students.

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