RE: Bloomberg: Northern Illinois University Borrows After Enrollment Gain
Per the last Board of Trustees Meeting
SERIES 2011 CHF BOND REFINANCING WITH SERIES 2021 AFS BONDS
Background on 2011 CHF financing
In 2011, in order to accelerate the construction of new residence hall facilities on campus, Northern Illinois University collaborated with Collegiate Housing Foundation (“CHF”) to privately finance and construct New Hall, and then leased it back to the University through the bonds maturity in fiscal year 2044. As part of this private, tax-exempt financing, a similar private financing completed with CHF in 2006 for the Northern View Apartments was also refinanced at that time. An amount of $121.9M is currently outstanding on these Series 2011 tax-exempt CHF Bonds (the “2011 CHF Bonds”) for which CHF is the underlying Obligor.
The University’s lease payments to CHF are used to:
a) pay debt pay service on the 2011CHF Bonds;
b) make required repair and replacement fund contributions; and c) pay CHF-related fees.
The Series 2011 CHF Bonds’ Management Agreement also requires the University to make additional payments if occupancy in the two residence halls falls below 95%, or if there is a revenue shortfall to meet debt service coverage requirements.
In such a case, NIU must support the project by providing the revenue shortfall needed to meet the debt service coverage obligations. In 2020, owing to lower occupancy due to the COVID-19 Pandemic and refunds provided to students, NIU provided support to the project in an amount of approximately $2.2M, on top of its usual payments to support bond debt service. This extra support allowed the project to meet its 1.2X debt service coverage ratio requirement for FY20.
Overview of the Refinancing Opportunity
While both New Hall and the Northern View Apartments are owned by CHF, NIU manages both facilities. The bond documents allow for the University to purchase the facilities by paying off the outstanding tax-exempt 2011 CHF Bonds and paying any accrued management fees. For NIU, the first opportunity to close such a refinancing, and simultaneously effect the purchase of the buildings and expansion of the Auxiliary Facilities System (AFS) will be on or after July 1, 2021.
The rate on the 2011 CHF Bonds for NIU’s project is very high at 6.86%, about 4% higher than the rate on NIU’s Series 2020 AFS bonds. As a result, NIU has been considering a refinancing of this debt through its AFS for some time. With the debt markets improving since the beginning of the pandemic, NIU is now poised to move forward with this refinancing (the “Series 2021 AFS Bonds”).
In addition to a reduction in payments owing to a lower rate (see “Potential Savings from a Refinancing” section below), the Series 2021 AFS Bonds refinancing will provide a number of operational flexibilities and economic efficiencies. These include the ability for NIU to set its own room rates for the two residence halls and avoid restrictive occupancy and “first fill” requirements, as well as cumbersome site-specific profitability requirements. NIU will also avoid duplicative and costly budgeting, audit and rating agency processes and fees.
Financing Climate (Ratings, Bond Insurance and General Rate Movements)
NIU’s Moody’s rating on its AFS bonds has been at “Ba2” (stable) since May 2019 and was re- affirmed in February of 2020. Moody’s has consistently said that it views the University’s
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commitments to the 2011 CHF Bonds as significant, and therefore already views those bonds as “on balance sheet” when it evaluates NIU’s creditworthiness. As a result, the University and its advisors do not expect the refinancing of this debt into the AFS system, in and of itself, to lower the Moody’s AFS rating.
The University’s Series 2020 AFS bonds carried bond insurance, which allowed NIU to refinance prior debt at low rates. However, it is unlikely that bond insurance will be available for the proposed Series 2021 AFS financing, at least not at this time. After extensive conversations with the Series 2020 bond insurer, Build America Mutual (“BAM”), the company indicated that it is unwilling to consider any commitment until mid-to-late Fall of 2021. BAM also noted that it would have a limit of about $40M on the amount of insurance it could offer, owing to the high level of NIU’s debt that it already insures. This would only cover 35% - 40% of the proposed Series 2021 AFS Bonds, if that commitment were ultimately made at all.
Between late 2020 and early February 2021, the market for uninsured higher education and other municipal credits has improved considerably, making savings from the refinancing of the 2011 CHF Bonds attractive. With rates historically low due to federal support of bond markets, more investors have been searching for higher yield investments, and have bid down the rates on debt for such issuers.
Guiding Principles of the Refinancing
University leadership has adopted the following guiding principles for this refinancing:
• The Series 2021 AFS Bonds will not include any monies for new projects;
• The new debt payments will not extend beyond FY44, the fiscal year of the final maturity
date of the Series 2011 CHF Bonds; and
• The refinancing will be structured to maximize savings in FY22-FY24 to mitigate
budgetary impact of closing the structural budget gap.
Bond Underwriter “Pricing Proposal” RFP Process
On January 12, 2021, the University and its long-time financial advisor, Longhouse Capital Advisors, sent out a “Pricing RFP” to the five members of NIU’s underwriting pool, which was established in late 2019. The University received five responses from pool members on January 28th. All underwriters provided estimated rates and fees for the refinancing, and all re-affirmed their business enterprise program (“BEP”) commitments. Based on the proposal content, Piper Sandler was selected as senior managing underwriter for the refinancing and Wells Fargo was selected as co-managing underwriter. BEP partner firms Backstrom McCarley Berry & Co., Estrada Hinojosa; and Siebert Williams Shank will also serve as co-managing underwriters.
Potential Savings from a Refinancing
Savings estimates from the underwriters’ Pricing RFP responses showed a minimum total savings over the life of the refinanced bonds of approximately $37.7M. Final savings will be subject to changes in rates and in the University’s underlying AFS rating, among other factors, and could be higher or lower than this estimate.
Next Steps: General Financing Assumptions / Unwinding of the CHF Agreements
The Plan of Finance that was provided to underwriters in the Pricing RFP assumed a fixed rate, uninsured AFS financing with a final maturity in FY44. The bonds are assumed to have no Debt Service Reserve Fund, although one could be included if it is found to significantly lower NIU’s overall rate. The bonds could price as early as April or May of 2021, with a closing in early July of 2021.
In parallel to the Series 2021 AFS Bonds financing process, the University plans to work with
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CHF to unwind the Series 2011 CHF Bonds’ lease and management agreements. NIU has already had an initial meeting with CHF to set out milestones for that process, and the organization has expressed its willingness to work to meet the University’s refinancing timeline.
University leadership will present an update at the Board of Trustees meeting scheduled for March 18, 2021.
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