UC taps into bond market for $1.7 billion

College system wants to use the money to fund capital projects and refund some issued paper

The University of California will tap the municipal bond market today as it looks to maximize refunding savings and navigate potential funding deferrals outlined in Governor Gavin Newsom's budget proposal for the next fiscal year.

The university is slated to issue roughly $1.7 billion of general revenue bonds to fund capital projects and refund previously issued paper. According to preliminary bond documents, $1.59 billion of the bonds will be tax-exempt and $145 million will be taxable — however the taxable series will be exempt from taxation in the state of California.

The 2024 bonds carry an Aa2 rating from Moody's Investors Service and double-A ratings from Fitch Ratings and S&P Global Ratings. The sale is being managed by Barclays Plc, Bank of America Securities and Jefferies.

Investor demand for the bonds is expected to be strong, according to Dan Solender, head of municipal debt at Lord, Abbett & Co.

“As long as the University of California deal is priced appropriately, it should get a good response for all its bonds,” Solender said. “Given the California exemption and the strong credit, they should be able to get lower yields than a lot of similarly rated bonds around the country.”

In May 2022, Newsom and the University of California announced a multiyear compact agreement that includes annual base budget adjustments of 5% for the university in fiscal years 20232024 through 2026-2027. The governor's “approach will enable the UC to continue its efforts to meet the compact goals to expand student access, equity and affordability, and to create pathways to high-demand career opportunities,” the bond documents say.

Funding for the university system increased about 7.9% during the current fiscal year. But in the face of a projected $37.9 billion budget deficit, Newsom proposed deferring a planned $227.8 million compact investment in the UC system to July 1, 2025.

“No one likes cuts, but it's important to keep in mind that state funding is only about 10% of revenues,” said Dora Lee, director of research at Belle Haven Investments. “So when you zoom out and look at the whole budget, the

cuts will be manageable.”

The University of California declined to comment for this story.

As the largest US public university system in terms of revenue, applications and enrollment, the University of California also operates six medical schools and three national laboratories. In fiscal 2023, it enrolled 289,696 full-time equivalent undergraduate and graduate students.

“We are still in a strong technical environment for municipals with many investors flush with cash to spend and primary supply is just starting to build,” said said Terry Goode of Allspring Global Investments. “Institutional and retail will likely find it attractive based on where existing municipal rates are currently.”