Blue architecture in a city

On April 30, 2020, Iowa’s Board of Regents successfully sold $17.65 million of Iowa State University (University or ISU) Dormitory Refunding Revenue Bonds. The successful sale serves as an important data point in the health of the current municipal market, particularly in the higher education sector. Since COVID-19 disrupted the market, there have been only a handful of higher education sales, and of those, the Board of Regents was the first to sell on a competitive basis. The refunding resulted in debt service savings and provided budgetary relief to the University in anticipation of future revenue pressure.

Key takeaways from this sale include:

  • There is an opportunity to sell higher education revenue bonds via competitive sale; issuers should expect fewer bids, but competitive rates
  • Refunds provide opportunities to restructure debt to match anticipated changes in revenue while still producing savings – specifically, it is often possible to concentrate all or most savings in the first one or two fiscal years to provide immediate cash flow relief
  • Rating agencies are not wholesale downgrading issuers, even in more challenged sectors

The refunding resulted in net present value savings of 6.57% of refunded debt service. The savings are a function of a very attractive bid received on the bonds at a true interest cost of just 2.06% on eight-year debt. The current low interest rate environment combined with the broader economic climate has resulted in some hesitation across all municipal buyers, with more buyers taking a wait-and-see approach than is typical. As a result, the University received fewer bids than they typically have had in the past. Nonetheless, the bonds were priced fairly, relative to current market conditions, and the winning bid generated the desired level of savings.

Baker Tilly Municipal Advisors structured the refunding to provide additional near-term benefit for the University. The bonds were structured to provide cash flow relief of $2.4 million in fiscal year 2021 (FY21), when revenues are expected to be most pressured. In addition, the debt service reserve fund required for the new issue was smaller than the reserves on the refunded bonds, allowing the University to release the difference from the reserve.

The bonds are backed solely by the net revenues generated by the ISU dormitory system. The ability to sell this limited pledge further supports the notion that there is still a market for higher education debt.

The University maintained its high quality ratings and stable outlooks from both Moody’s and S&P on all its outstanding debt. The bonds were assigned an Aa2 and an A+ rating by Moody’s and S&P, respectively. These favorable rating outcomes were achieved despite both agencies having a negative outlook on the higher education sector, and Moody’s categorizing the sector as among the highest risk for downgrade resulting from COVID-19 among municipal issuers. In conversations with the rating agencies, the University was able to demonstrate their thoughtful preparedness and responses to COVID-19. According to Moody’s, the stable outlook “incorporates management’s credibility and track record of planning and adjusting to changing business conditions.”

The sale success can be attributed to the University’s high credit quality, rapid and transparent response to risks associated with COVID-19, and strong market demand for Board of Regents bonds.

For more information on this topic, or to learn how Baker Tilly Municipal Advisors can help, contact our team.

Elizabeth Bergman
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