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Indiana University

Finance Affairs

 

Good Credit, Good Rate

Aa1 Credit Rating Drives Successful Debt Issuance

Everyone knows that a good credit rating makes it easier and cheaper to borrow money when you need it, and universities are no exception. When a university issues bonds for the construction of new buildings, that institution’s credit rating is a key factor for investors.

Indiana University’s high credit rating enabled the university to close two large deals this spring at historic low interest rates. The university’s credit rating was upgraded in June 2007 by Moody’s Investors Service from Aa2 to Aa1—next to the highest rating possible. “Only five other public institutions of higher education share this rating level with IU,” says IU Treasurer MaryFrances McCourt. “The credit rating upgrade was the result of consistently strong financial performance, strong governance, and committed financial support from the state of Indiana.”

That rating made a big difference when IU needed to issue two sets of bonds for capital projects in an unstable market. “It was a period of severe market illiquidity (tight money) and unprecedented market volatility,” explains McCourt. “During this time of widespread fear, the markets experienced an exaggerated ‘flight to quality.’ Many of the lower-rated debt issuers found it difficult to close deals, and/or their debt was issued at very expensive levels. On the other hand, debt issuers with extremely strong credit, such as IU, not only had interested buyers—but they experienced very low interest rates.”

As a result, IU’s Consolidated Revenue Bonds, Series 2008A with a par value of $182.8 million, closed at an interest cost of 4.15 percent. These bonds helped finance six projects with terms out to 30 years. Student Fee Bonds, Series S with a par value of $88.3 million, closed at an interest cost of 4.08 percent. These bonds helped finance an additional six projects with terms out to 25 years. The success of these deals has lowered the university’s overall cost of capital on debt of $755 million to 4.4 percent.

These favorable bond issues are good news for IU as the university undertakes new initiatives. “We’re committed to maintaining our position of financial strength as we work to support the financing of IU’s strategic capital plan,” explains McCourt. “And we continue to seek innovative ways to enhance the university’s financial flexibility through expanded capital finance tools.”