Board of Regents Meeting December 4-5, 2008 Agenda Item # 21 EXECUTIVE SUMMARY Page 1 of 4 ITEM NAME: Issuance of SPEED Revenue Bonds for Financing of SPEED Projects (NAU) Action Item Discussion Item Information Item Issue: Northern Arizona University seeks Board authorization to sell SPEED Revenue Bonds (1) not to exceed $64.14 million for paying the costs associated with five building renewal projects; (2) not to exceed $675,000 to pay costs of issuance; (3) to make payments to a bond insurer or other credit enhancer provided that such payments provide a benefit that exceeds the amount of such payments; and (4)to make payments pursuant to any related interest rate swap or lock agreements. Previous Board Action: Project Implementation and Project Approval: September 2008 SPEED Projects Allocation: July 2008 Capital Development Plan: June 2008 Projects to be financed: The proceeds of the bond issuance will be used to finance the NAU capital projects set forth below: Skydome ADA/ Health Issues $21,900,000 Liberal Arts $ 8,900,000 Hotel Restaurant $ 7,340,000 North Utilities $22,000,000 North Union $ 4,000,000 Proceeds of the bond sale will also be used to pay the costs of issuing the bonds. Statutory/Policy Requirements: Board Policy 7-102D requires Capital Committee review and Board approval of all bond and COPs financings. A.R.S. 15-1682.03 provides for the University Capital Improvement Lease-to-Own and Bond Fund, funded by up to 80% from the State Lottery and at least 20% from the universities CONTACT: Kathe Shinham, VP Administration & Finance 928-523-6104 Kathe.Shinham@nau.edu Board of Regents Meeting December 4-5, 2008 Agenda Item # 21 EXECUTIVE SUMMARY Page 2 of 4 Background: In conjunction with the Stimulus Package for Economic and Educational Development (SPEED) initiative, Northern Arizona University (NAU) requests authority to sell its initial issuance of SPEED Revenue Bonds in an amount to produce sufficient proceeds to finance five building renewal projects as outlined herein and the related costs of issuance, and to take all related actions and enter into all necessary agreements related to the bonds. The SPEED Bonds will be secured by and payable from the newly created University Capital Improvement Lease-to-Own and Bond Fund (the “SPEED Fund”) established during the last legislative session. Pursuant to that legislation, 80% of the annual debt service payments for the SPEED Bonds is to be provided from revenues generated by the State’s lottery and 20% from amounts annually budgeted and provided by the Board from the University’s revenues, all of which are deposited to the SPEED Fund. In order to provide the necessary security and credit support to be able to sell the SPEED Bonds to investors, the Bonds will be further secured by a subordinate lien on the gross system revenues of the University that are pledged to its System Revenue Bonds. Fiscal and Financing Plan: NAU intends to finance the construction and improvement of the capital projects listed above by issuing one or more series of SPEED Revenue Bonds. The Bonds will be secured by and payable from monies deposited to the SPEED Fund, which is administered by the Board. Up to 80% the annual debt service payments on the Bonds is to be provided from distributions of revenues generated by the State’s lottery and not less than 20% of the annual debt service payments are to be provided by University funds deposited to the SPEED Fund by the Board on behalf of the University. The SPEED funding mechanism provides monies for 100% of the annual debt service payments on the Bonds. However, in order to obtain an investment grade rating on the Bonds, as well as to be able to obtain investors willing to purchase the Bonds, additional security must be provided to create debt service coverage on the Bond payments. To accomplish that, the Board on behalf of the University will provide that the Bonds are further secured by and payable from a subordinate lien on the University’s gross system revenues. The lien will be subordinate to the pledge of these revenues that secures the University’s existing and future System Revenue Bonds. The bonds will likely be sold based solely on the credit ratings assigned to the University’s SPEED Bonds. While ratings have not yet been obtained on the Bonds, the expectation is that the Bonds will carry ratings somewhere in the “A” category. The University will also solicit bond insurance and fee quotes from select bond insurers, with the use of bond insurance only occurring if it provides a benefit to the Board and the University, net of paying the cost of the insurance. Board of Regents Meeting December 4-5, 2008 Agenda Item # 21 EXECUTIVE SUMMARY Page 3 of 4 The bonds will be sold at a tax-exempt interest rate and the true interest cost for the bonds is not expected to exceed 7.0%. Pursuant to the statutes, the SPEED initiative projects are exempt from the debt ratio requirements. However, if the debt were to be included in the ratio, with the issuance of these bonds, NAU’s debt ratio would not exceed 5.99% for the statutory limit. The financing is designed to be structured conservatively around projections of estimated lottery revenues, with interest-only payments for the first 5 years of the debt service. Following that, the debt service is structured with level annual debt service payments through the final maturity in 20 years. NAU will be called upon to enter into various agreements in conjunction with the bonds. These may include a bond insurance agreement (provided that it lowers the net borrowing cost), a continuing disclosure agreement and a bond purchase agreement. For the proposed financing, NAU intends to use Ballard Spahr Andrews & Ingersoll, LLP as bond counsel and RBC Capital Markets as financial advisor, each of whom was selected through a competitive proposal process. The bonds will be marketed and sold on a negotiated basis by one or more investment banking firms. NAU will select the banking firms through a competitive proposal process. The action requested will authorize NAU to execute this financing within the parameters approved by the Board. It is anticipated the initial series of SPEED Revenue Bonds will be sold and closed in February 2009. Committee Review and Recommendation: The Capital Committee reviewed this item at its November 19, 2008 meeting and recommended Board approval for NAU authority to: 1. Issue $26.3 million for project and issuance costs, and to take related necessary actions, and 2. Issue an additional $38.5 million for project and issuance costs, and to take related necessary actions, provided necessary legal requirements have been met. Recommendation: Resolved: That Northern Arizona University be, and hereby is, authorized to sell one or more series of SPEED Revenue Bonds to produce sufficient proceeds to finance (1) not to exceed $64.14 million for paying the costs associated with five building renewal projects; (2) not to exceed $675,000 to pay costs of issuance; (3) payments to a bond insurer or other credit enhancer provided that such payments provide a benefit that exceeds the amount of such payments; and ( 4) payments pursuant to any related interest rate swap or lock agreements. The SPEED Bonds are authorized to be secured by and payable from monies deposited to the University Capital Improvement Lease-to-Own and Bond Fund established by Arizona Revised Statutes section 15-1682.03 and by a subordinate lien on the University’s system revenues that are pledged to system revenue bonds. The University would be further Board of Regents Meeting December 4-5, 2008 Agenda Item # 21 EXECUTIVE SUMMARY Page 4 of 4 authorized to sell the SPEED Bonds at a price at, above or below par and at a fixed rate of interest; to take related actions; and to enter into necessary agreements and to execute all necessary documents including those related to bond insurance or other credit enhancement and derivative agreements, all as more fully provided in a Board resolution reviewed by Board Counsel.