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U.Va., Backed By Highest Possible Credit Rating, Sells $250 Million in Bonds

April 15, 2009 — Armed with its reaffirmed "triple-triple" credit rating, the University of Virginia today sold $250 million in construction bonds to support 19 building projects.

The University is the first institution of higher education in the nation to offer benchmark-level taxable Build America Bonds, which are partially subsidized by the U.S. Treasury through the American Recovery and Reinvestment Act of 2009 – or ARRA – which was signed into law in February. Participating in the program could save the University approximately $60 million in interest payments over the bonds' 30-year term, University officials said.

The bond issue will help finance $800 million in University construction projects, including several at the U.Va. Health System.

At a meeting of the Board of Visitors earlier this month, Leonard W. Sandridge, executive vice president and chief operating officer, assured board members that the University possessed more than adequate capacity to take on the new debt. Revenue streams have been identified for each project that will allow the University to meet its bond obligations in 20 years – well before the bonds mature, he said.

The three major credit agencies — Fitch, Standard & Poors and Moody's — apparently shared Sandridge's assessment of U.Va.'s financial health. After University officials traveled to New York in March to go over the University's books, all three agencies reaffirmed their highest-possible AAA bond ratings. U.Va. and the University of Texas system are the only public universities to have earned a triple-A bond ratings from all three credit agencies.

In announcing its rating, a Fitch press release said, "The long-term 'AAA' rating reflects U.Va.'s status as a premier U.S. public university." It cited undergraduate and graduate student demand, strong fiscal management, diversity of revenue, "exceptional" investment management by the University of Virginia Investment Management Company, the presence and stability of the Medical Center and the progress of the $3 billion capital campaign.

"Credit risks are minimal," Fitch concluded.

Investor reaction to the bond issue was overwhelming. An hour after the deal was released to the market, J.P. Morgan, the lead underwriter, had received more than $1.2 billion in orders for the bonds – an oversubscription of five times the issuance amount – allowing the University to price the bonds at a very attractive taxable rate of 6.222 percent.

"We are very pleased with the very positive outcome of the $250 million bond issue, especially in the midst of such a difficult economic environment," Sandridge said. "We had a strong internal bond team, a supportive Board of Visitors and exceptional outside professionals working on this deal – together, they produced outstanding results.

"The combination of the University's strong credit with the Build America Bond program will result in lower costs and better facilities for our students and patients for many years. Our employees are committed to preserving the fiscal integrity of the University and they have worked hard to keep the University moving forward. It is good to see the markets reward them – and the institution – in this way."

Under the Build America Bond program, the federal government will subsidize 35 percent of the interest costs. With that subsidy, the bonds' effective interest rate to the University is 4.04 percent, well below the 4.875 percent "indicative rate" carried by comparable tax-exempt bonds, said James Matteo, assistant vice president for treasury operations and fiscal planning.

Matteo calculated that the University will save approximately $2.1 million per year in interest payments, or $60 million over the 30-year term.

The annual savings will be put to good use, Yoke San Reynolds, U.Va.'s vice president and chief financial officer, said.

"We now have an opportunity to reinvest some portion of the $2 million savings per year in other University priorities that have suffered the impact of funding cuts which is the intention of the ARRA," she said "Options might include advancing capital projects that were put on hold and offering targeted relief to critical areas that are struggling as a result of reductions in our workforce. So these interest savings will either mitigate cost increases for patients and students, or if reinvested, will provide a boost to the economy."

Alongside state and private funding, the bonds will support 19 capital projects.

At the University, projects to be funded include a research building for the College of Arts & Sciences ($88.9 million); the newly christened Rice Hall ($76.3 million), which will house the Engineering School's Information Technology Engineering program; and renovations to Newcomb ($15.2 million) and Garrett ($14 million) halls, among other projects.

In the Health System, the bonds will support a new clinical cancer center ($74 million), hospital expansion ($80.2 million), an invasive heart center ($15.5 million), a new clinics building at Fontaine Research Park ($21.3 million) and additional operating rooms ($14.2 million), among other projects.

– by Dan Heuchert

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