April 7 (Bloomberg) -- The universities of Connecticut and Kentucky, whose men’s basketball teams face off tonight for the national championship, are joining public colleges across the U.S. seizing on the municipal market’s best start since 2009.
Higher-education institutions have issued $5.2 billion of debt this year, about 6.7 percent of sales across the entire local-debt market, data compiled by Bloomberg show. That would be the biggest percentage since 2008. Last week, the University of California, the University of Texas System and University of Oklahoma offered $1.3 billion, or about 30 percent of sales.
Flagship state universities have led the borrowing. They are capitalizing on individual investor demand for bonds from brand-name schools, according to Regina Shafer at USAA Investment Management Co. The institutions also stand to “get a jolt” financially from succeeding in the National Collegiate Athletic Association men’s basketball tournament, according to a report last week from Standard & Poor’s.
Larger state schools “are borrowing because money is cheap and they can afford it,” said Alan Schankel, a managing director focusing on muni research and strategy at Janney Montgomery Scott in Philadelphia. “They don’t need to borrow, it’s more that they can, and at a relatively low rate.”
The use of bonds defies a decline in sales for the $3.7 trillion municipal market. Debt issuance last quarter tallied $59 billion, the slowest pace since 2011, even as yields are close to five-decade lows. At the local level, schools are shunning debt. School districts in Pennsylvania are selling the fewest bonds in seven years.
The 4.2 percent advance for education-related bonds this year follows a 2.9 percent loss from 2013, Bank of America Merrill Lynch data show. Munis as a whole have gained about 4 percent, the best start to a year since 2009.
Public universities have been amassing debt at a faster pace than their private nonprofit counterparts, according to Moody’s Investors Service. Public institutions rated by Moody’s had an average debt load of $213 million in 2012, up about 24 percent from 2008. Average private school debt grew about 10 percent in the same period, to about $109 million, Moody’s said.
The growing debt load has coincided with a historic drop in public funding for higher education as states cut costs because of the recession that ended in 2009. After state and local-government support for colleges and universities peaked at $88.8 billion in 2008, it tallied $81.3 billion in 2012, according to the Boulder, Colorado-based State Higher Education Executive Officers association.
Flagship universities are in a better position among public institutions to weather slowing revenue growth and rising expenses, according to Moody’s. In fiscal 2012, the schools’ median revenue growth was 1.7 percent, while expenses climbed at almost double that rate.
The median enrollment increase for schools with Moody’s top credit rank was 1 percent in 2012, while those rated six steps lower fell 3.2 percent.
Flagships and university systems have about $111 billion of debt and a median Moody’s rating of Aa2, third-highest. Regional four-year public schools have $24 billion of bonds and a median grade two steps lower, at A1.
The largest higher-education muni deal this year was for $970 million by the University of California, the biggest U.S. system combining education, research and health care. The universities of Texas, Massachusetts, Maryland, Illinois, Nebraska and Iowa have also issued munis in 2014.
UConn, whose men’s basketball team won in the semifinal April 5 to earn a spot in tonight’s game, is offering about $203 million of tax-free debt in a sale that will wrap up tomorrow. Kentucky, the other semifinal victor, issued $239 million in March. To reach the Final Four stage of the tournament, known as March Madness, the Wildcats defeated the University of Michigan, which borrowed $92 million in February.
While Connecticut was seeded one level higher than the Wildcats in this year’s tournament, UConn’s Aa3 Moody’s rating is one step lower than Kentucky’s.
Even with the lower rating, UConn’s relative borrowing costs in this week’s deal are poised to be lower than Kentucky’s when it issued debt last month.
UConn’s sale to individuals today includes a portion due in February 2034 that’s being offered at a preliminary 3.72 percent yield, according to three people familiar with the sale who requested anonymity because the pricing wasn’t final. That’s 0.34 percentage point more than benchmark munis, data compiled by Bloomberg show.
By comparison, Kentucky bonds maturing in 20 years priced to yield 3.8 percent in March, or about 0.5 percentage point more than top-rated munis.
The other two Final Four teams were also flagship state schools: University of Florida and University of Wisconsin.
“High-profile sports events such as March Madness can give public and private colleges and universities a leg up in pursuing students and money,” Bianca Gaytan-Burrell, an S&P analyst, wrote in a report this month. “This is especially important given that tuitions and fees are already high and rising well above the rate of inflation.”
Securities of the best-known schools draw mutual funds and insurance companies because they carry higher ratings and are easier to sell, preserving value should interest rates rise, said Shafer, who oversees $5.6 billion of munis at USAA in San Antonio.
The tax-free market doesn’t encompass all sales from universities, since some private schools issue taxable bonds through the corporate-bond market, Schankel said.
Muni investors missed out on a 100-year deal from the Massachusetts Institute of Technology last week. The school sold $550 million of taxable bonds to yield 4.68 percent, Bloomberg data show. Yale University, which trails only Harvard University in the size of its endowment, issued $250 million of taxable notes last week.
“It’s a sector that the market is looking for from a diversification standpoint,” since colleges have different revenue streams than local governments, said Tim McGregor, director of municipal fixed income in Chicago at Northern Trust Corp., which oversees about $32 billion in munis.
UConn’s basketball success in 2014 may help it again price its bonds at yields below state general obligations, said John Sullivan, the university’s manager of treasury services.
“I’ve got to admit, with the NCAA Tournament, it’s good timing,” he said.
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