Market Favors Sexton Vision With NYU Best Since ‘10: Muni Credit
New York University’s $1.9 billion plan to expand its campus has alienated faculty, angered residents and prompted lawsuits. Municipal bondholders remain unfazed, rewarding the school with the lowest borrowing costs since 2010.
The school, whose alumni range from former Federal Reserve Chairman Alan Greenspan to film director Spike Lee, is selling about $160 million of tax-free and taxable munis this week to pay for renovating and constructing buildings near its Greenwich Village campus. Some university bonds are trading with the smallest amount of extra yield over benchmark debt in almost three years.
Lawsuits from faculty and neighborhood groups against the school serve as the backdrop for the borrowing. They claim the university’s NYU 2031 expansion plan will destroy the character of the area. It’s the latest round in a decades-long fight, said Howard Cure, head of research at Evercore Wealth Management LLC in New York.
“When you’re located in an activist community like the Village, there’s always concern about expanding and how it might change the neighborhood,” said Cure, whose company oversees about $4.7 billion in assets, including NYU bonds.
“They have done very well fundraising and they have ambitious goals for expanding and improving programs,” Cure said in an interview. “The school has maintained its reputation. The sale should do well.”
In a generation, NYU transformed from a regional school to an international research university with campuses in Abu Dhabi and Shanghai and study centers in Europe, Asia, Africa and South America. President John Sexton has more than doubled the school’s endowment and its financial-aid budget since his tenure began in 2002. With about 45,000 students, NYU is one of the largest U.S. private, nonprofit universities.
The school said last month that Sexton, who has pushed for the 2031 expansion, will leave when his term ends in 2016, when he will be 74. The Faculty of Arts & Science passed a vote of no-confidence in Sexton in March, saying he failed to consult with them on the expansion. The result was non-binding.
Planners hired by NYU initially discussed adding 6 million square feet (557,400 square meters), which could have cost $6 billion. NYU is moving forward with a $1.9 billion, 1.9 million-square-foot plan. This week’s borrowing, through the Dormitory Authority of the State of New York, isn’t funding the 2031 expansion, which still needs approval from the school’s board of trustees.
Investors in the $3.7 trillion municipal market are betting the school’s approach will pay off.
NYU bonds issued by the dormitory authority and maturing in July 2019 yielded 1.95 percent on Sept. 23, data compiled by Bloomberg show. That was 0.09 percentage point more than the interest rate on benchmark munis, the narrowest spread since December 2010.
Moody’s Investors Service rates the NYU securities Aa3, the fourth-highest grade, citing a “growing global presence” and “highly marketable real estate holdings in Manhattan.”
NYU offered tax-exempt bonds yesterday, with debt maturing in July 2023 priced to yield 2.89 percent, Bloomberg data show. That compares with 3.09 percent on benchmark AA revenue bonds.
Education bonds lost 1 percent in the three months through Sept. 20, the least among 10 revenue-debt segments tracked by Barclays Plc. The average rating on the group is the same as NYU’s grade.
“Education gives you some diversification and a different source of revenue,” said Dan Solender, head of munis in Jersey City, New Jersey, at Lord Abbett & Co., which oversees $16.5 billion of local debt. “If they have a good market position and endowment, it’s a whole different source of credit quality.”
The second-biggest holding in Lord Abbett’s $324 million New York tax-free muni fund is NYU debt maturing in July 2034, Bloomberg data show. Over the past five years the fund has beaten 97 percent of its peers, the data show.
U.S. News & World Report ranks NYU 32nd among national universities. The Stern School of Business’s graduate program places 10th, and its law school is sixth.
Greenwich Village has been home to artists, writers and musicians, including Bob Dylan, Jackson Pollock, Mark Twain and Edith Wharton. The actor Matthew Broderick joined hundreds of neighbors at a council meeting in 2012 to oppose the construction.
“It’s 2 million square feet of construction crammed into two small square-blocks, literally in the heart of the Village,” Randy Mastro, an attorney representing faculty and neighborhood organizations, told state Supreme Court Justice Donna Mills at a hearing in Manhattan in July.
More than 100 people packed the courtroom two months ago, many holding signs and wearing stickers opposing the expansion. Audience members included Padma Lakshmi, co-host of the television show “Top Chef,” who said in an interview afterward that she lives in the neighborhood and attended the hearing as a “concerned mother.” The parties await a decision.
New York State Supreme Court Justice Ellen M. Coin in March dismissed a similar suit filed by tenants of Washington Square Village, a group of high-rise buildings. The tenants who filed the suit have appealed.
“We believe we will prevail on the merits, but whatever the outcome of the litigation, it will not have a material effect on the financial position of the university or its ability to make its required debt-service payments,” Philip Lentz, an NYU spokesman, said in an e-mail.
The legal actions against NYU matter less to bondholders than the school’s reputation and student demand, said Regina Shafer, who oversees $5.4 billion, including NYU debt, at USAA Investment Management in San Antonio.
NYU has maintained its student population even as it raised tuition 16 percent in the past four years. Undergraduates paid as much as $49,242 during the 2013-2014 academic year, bond documents show. The total cost of attending the university is the highest among a 25-member peer group of private colleges because of housing prices in the city, according to the documents.
The university’s plan to grow its campus has a benefit beyond providing space for new programs. Adding real-estate gives the school assets should it need to raise money, Evercore’s Cure said.
“As long as the city maintains its desirability for people to visit, work and take part in a dynamic cultural center, there will be demand for NYU’s programs,” Cure said. “The tradeoff in being located in such a desirable area is you have to deal with community activism. They usually end up working it out.”
The ratio of the yields, a gauge of relative value, is about 102 percent, compared with an average of 93 percent since 2001. The higher the figure, the cheaper munis are compared with federal securities.
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