The University of Arizona will hit the municipal bond market this week with its first bond issuance since financial troubles led to a negative rating outlook from Moody’s Ratings and S&P Global Ratings.
A $115,645,000 Stimulus Program for Economic and Educational Development (SPEED) revenue bond issued through the Arizona Board of Regents will repay debt issued by the Tucson-based university in 2013 and 2014. .
The university’s Aa2 and AA-minus senior lien ratings and Aa3 and A-plus subordinate lien bond ratings applicable to repayments had their rating outlooks revised from stable to negative by Moody’s and S&P, respectively, earlier this year. .
The Tucson-based University of Arizona, which was hit with a negative rating outlook earlier this year, scheduled a Morgan Stanley-led debt repayment on Wednesday.
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Insurance will enhance the creditworthiness of this transaction.
“Our financial advisors have identified the economic benefits of having the bonds insured by AA-rated Build America Mutual,” university spokesman Mitch Zak said in an email. said in an email, referring to the S&P rating.
In fiscal year 2023, the University’s cash reserves decreased to $704.5 million from $844.5 million at the end of fiscal year 2022, resulting in 110 days of cash on hand, below the Board’s requirements.
Last December, then-Regents Chairman Fred Duvall said the decline was a sign of the university’s continued budget deficit and decentralized financial and reporting structure, where conditions did not immediately signal. Ta.
“The University has made significant financial progress, including reducing its fiscal year 2024 budget deficit from more than $177 million to approximately $63 million in six months,” Zack said. “In the coming years, university leaders will continue to invest in academics and impact-focused research, while laying the foundation for balanced budgets and sustained fiscal stability.”
The university responded to the deficit, primarily due to operating losses and lack of physical activity, with several measures, including freezing hiring, restricting purchases and travel, and postponing non-essential capital projects. Enhanced financial reporting and spend controls were also introduced, narrowing the gap to $63 million.
The fiscal year 2025 unrestricted funds operating budget projects a deficit of $65 million, which includes approximately $1.3 billion in allocated funds.
The university ended the 2024 fiscal year with $641 million in cash reserves on June 30, which is expected to decline to $576 million by the end of the 2025 fiscal year, Zack said.
Last year saw a flurry of governance changes.
The university’s chief financial officer has resigned and been replaced by John Arnold, executive director of the board of trustees.
University President Robert Robins, whose salary was cut by the board in March, remained in office until Suresh Garimella took over as president last week. Cecilia Mata currently serves as Chair of the Board of Regents.
Moody’s said in its September rating report that “prolonged governance instability” as well as other factors could lead to a downgrade, including declining financial reserves and continued weak and unstable operating results. said.
The report added that the Aa2 issuer rating incorporates the university’s “excellent brand,” steady student growth and broad geographic appeal.
S&P’s rating report noted that the university had a “very strong corporate risk profile and strong financial risk profile with stable demand and a strong research presence,” but it cited weak operational and balance sheet metrics, and It said this was offset by higher debt service costs. However, in the short term, a large amount of principal is written off.
“The negative outlook reflects short-term pressure on U of A’s operations during the outlook period, and deterioration in balance sheet metrics could result in a rating downgrade,” S&P analyst Laura MacDonald said in a statement. “This reflects our expectation that there will be.”
On October 1, Suresh Garimela was appointed president of the University of Arizona.
University of Arizona
The university’s negative outlook bucks a trend identified by S&P in its September report, which found that 90% of public universities currently have a stable outlook and that 90% of public universities currently have stable outlooks and that they are “not benefiting from state support.” “As a result, they are weathering the pandemic better overall (than private colleges and universities).”
Arizona’s Democratic governor, Katie Hobbs, pressed the university to get back on its feet, calling for “adequate oversight and accountability” from the regents. In August, she appointed Lee Stein, a former assistant U.S. attorney and special assistant to the Arizona attorney general, to the regents board.
Hobbs also questioned the university’s acquisition of online for-profit Ashford University, which was rebranded as the University of Arizona Global Campus.
Ashford University had a troubled history before being acquired by the university in June 2023. The state of California successfully sued the school for making misrepresentations to student loan borrowers, and the U.S. Department of Education approved $72 million in loan relief and repayments. In August 2023.
A preliminary official statement regarding refunds said the federal agency has not yet sent “required refund notifications” to the university or its global campus organization.
Moody’s said continued consolidation risks associated with the University of Arizona Global Campus would further tighten the university’s already tenuous liquidity position.
The university has $935 million in outstanding debt secured by a first lien on system revenue, according to POS. After repayment, outstanding junior SPEED debt will total approximately $272 million.
The last bond sale was in 2021, with approximately $225.8 million of tax-exempt and taxable first lien new and refinancing bonds sold.
The university’s latest capital improvement plan calls for three new projects totaling $60 million, with $45 million of the cost to be financed by bonds.
Founded in 1885 as Arizona’s only land-grant institution, the university enrolled more than 53,000 students last fall.
According to an investor presentation, out-of-state students will account for 51.2% of the total workforce in the past five years, increasing from 41.5% in fall 2019 to 51.2% in fall 2023, partly due to the impact of nonresident tuition. Revenue increased by 55%. Refund issue. State funding accounted for 17% to 19% of the university’s unrestricted operating funds from fiscal year 2019 to fiscal year 2023.
Debt service on SPEED bonds is paid for with certain state lotteries and university revenues, and is secured by a sub-collateral of the university’s gross receipts.
The refund, which is scheduled to be priced on Wednesday, consists of a series of maturities from 2025 to 2044, according to POS.
“80% of the SPEED bonds are serviced by the Arizona State Lottery Fund and 20% by the university, so most of the savings will come from the Lottery Fund,” Zack said. “Current estimates are $16 million (net present value) in savings, depending on pricing.”
Morgan Stanley leads the underwriting teams of BofA Securities, Goldman Sachs and JPMorgan. The fixed income advisor is Squire Patton Boggs and the financial advisor is RBC Capital Markets.
