With interest rates low but expected to rise this year, the University of Michigan plans to issue about $1 billion in bonds in the coming weeks to finance future construction and renovation projects.
The Board of Regents unanimously approved the resolution Feb. 17, granting authorization for the issuance of up to $2 billion in general revenue bonds that will provide the university additional flexibility to respond to market conditions.
Most economists believe the U.S. Federal Reserve will raise its benchmark interest rate multiple times throughout the year, beginning in March, leading to higher interest rates from lenders.
“The idea is to lock in good rates right now while we still have them,” said Geoffrey Chatas, executive vice president and chief financial officer.
“Regardless of what the market does in the near term, we know that our capital construction needs will only continue to grow. Prefunding those capital needs now and changing our internal lending structure will ensure rate stability for years to come, regardless of what the market does.”
This transaction — the first time U-M has entered the bond market since 2020 — will mark a couple of “firsts” for the university.
It will include the university’s first issuance of a century bond — estimated at $700 million — which is structured to be repaid over 100 years instead of the more traditional 30 years. The longer maturity allows the university to repay the bond by investing a relatively small amount of money now and grow that sum exponentially through compounding interest.
The university also intends to issue its first green bonds, estimated at $300 million. Green bonds can only be sold and used to fund “green” capital projects that support climate-related or environmental goals.
“The market for environmentally conscious investments has been growing for years,” Chatas said. “This particular bond option dovetails well with our university’s sustainability goals and will provide a funding stream for the construction and renovations needed to help us achieve them.”
In addition to the “new money” issuance of up to $2 billion in bonds, regents also were provided detail on two additional bond deals, including:
- An advance refunding transaction, which is a refinancing of an estimated $475 million in outstanding debt at better rates.
- A current refunding of approximately $69 million from an outstanding bond series that will convert those bonds from a variable rate of interest to a fixed rate.
The university will work with several minority business enterprises to complete the financial transactions, including Loop Capital, which is co-leading the $1 billion bond issuance.
Siebert Williams Shank, a women- and minority-owned investment banking firm, is leading the current refunding transaction and co-leading the advance refunding transaction. Additional banks selected to help distribute the bonds will include other minority business enterprises and service-disabled veteran-owned business representation.
Chatas said these bonds, like all existing bonds and commercial paper notes of the university, would be supported by a pledge of the university’s general revenues.