April 26 (Bloomberg) -- Debt of Rutgers University is gaining the most since May even after a coaching abuse scandal roiled New Jersey’s largest public college and added to its risk of a credit downgrade.
Securities of the eighth-oldest U.S. college are benefiting from the longest rally in 20 years in similarly rated municipal bonds. The school fired its men’s basketball coach this month after video showed him kicking players and hurling epithets. Moody’s Investors Service called the issue a “credit negative” that may curb donations. It put Rutgers on review for a rating cut in November because of debt it may take on as it acquires a health-sciences university.
Still, the extra yield on Rutgers bonds over AAA munis has shrunk about 25 percent since November, and is close to an 11-month low, data compiled by Bloomberg show. Investors want New Jersey debt apart from the state’s general obligations as well as the higher relative yields, said Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York.
Benchmark local issues offer “yields so painfully low that investors are going to overlook those and try and get a little extra yield by going down a notch or two on the credit spectrum,” said Pietronico, who oversees $910 million of munis.
Founded in 1766 and based in New Brunswick, about 42 miles (68 kilometers) southwest of Manhattan, Rutgers has more than 58,000 students on three campuses. It’s set to merge with the University of Medicine & Dentistry of New Jersey July 1. Moody’s rates Rutgers’s $1.2 billion of debt Aa2, third-highest.
Munis graded AA, the same as Rutgers, have earned 1.3 percent this year, compared with 1 percent for AAA benchmarks, Bank of America Merrill Lynch data show. AA bonds also beat top-rated munis in 2012 and 2011, for the longest winning streak since 1992.
“Typically a state university, a flagship university, is a good credit story,” said Phil Condon, who manages $26 billion of munis at Boston-based DWS Investments. “It’s supported by the state government, has a brand and has strong matriculation.”
The school is investigating how the basketball program managed claims of abusive behavior by the coach, Mike Rice, after Rutgers suspended and fined him four months ago instead of firing him, Moody’s said in a report this month. Rutgers fired Rice April 3. Athletic Director Tim Pernetti resigned two days later. University President Robert Barchi has stayed on.
Pietronico said Rutgers will emerge more quickly from its coaching scandal than Pennsylvania State University, where former President Graham Spanier was ousted over the Jerry Sandusky child sex-abuse scandal. The school has the same Moody’s rating as Rutgers.
“This is not Penn State,” Pietronico said. “This is not a situation where the credit will be weakened because of potential law suits.”
Rutgers faces the threat of a credit downgrade because of how the university handled the abuse claims, which may cause donor support to “wane” as the school investigates the issue, Edith Behr, a Moody’s analyst in New York, said in the report.
“These events are a credit negative for Rutgers because they draw criticism from national media and public officials, raise questions about governance and management practices at the university, and strengthen the possibility of government investigations and possible legal actions,” Behr wrote.
“We are optimistic that we will preserve our credit rating,” Steve Manas, a Rutgers spokesman, said in an e-mail. “We are confident that the university will move beyond these transitory matters without any long-term negative effects on our financial position.”
Even with a potential rating cut, investors are demanding less additional yield on Rutgers debt, using BVAL pricing analysis.
Rutgers bonds callable in May 2020 and due four years later are valued at a yield spread of about 0.8 percentage point above benchmark debt, compared with about 1.1 percentage points Nov. 20, the day before Moody’s placed the school under review for downgrade.
The difference was as low as 0.73 percentage point last month, the narrowest since May.
Investors are looking to pad returns with 20-year general-obligations yielding 3.89 percent, below the 52-year average of about 5.9 percent, a Bond Buyer index shows.
Miller Tabak has an internal grade on Rutgers two levels below what the rating companies assign, Pietronico said.
While the school’s yield spreads have narrowed, Rutgers debt gives investors an alternative to New Jersey’s general-obligation credit or debt repaid with state revenue that’s allocated annually by the legislature, he said.
“If we’re getting compensated for that A1 rating that we have internally, we’ll go ahead and buy the bonds,” Pietronico said. “Rutgers is a name we own and we’re comfortable owning it.”
Issuers led by the Iowa Finance Authority, which is offering $1.2 billion of tax-exempt revenue debt, plan to sell about $3.6 billion of long-term munis next week, the slowest period since March, Bloomberg data show. Proceeds of the Iowa sale will finance a fertilizer facility.
Ten-year benchmark munis yield 1.77 percent, close to a three-month low. Still, the tax-exempt bonds are cheaper than comparable-maturity Treasuries, which yield 1.71 percent.
The yield ratio between the two securities, a measure of relative value, is about 104 percent, compared with the five-year average of about 100 percent. The higher the ratio, the less expensive munis are compared with federal debt.
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