Editorial roundtable Higher-education funding transformation sea change in the way Australian universities are approaching funding their research, education and accommodation facilities has caused a A mini-boom in higher-education bond issuance since April 2014 (see table on p62). In March 2016, the five names from the sector that have issued this decade talked exclusively to KangaNews about how their market engagement developed and how it might progress in the future.
PARTICIPANTS n Daniel Baird Director, Corporate Finance UNIVERSITY OF MELBOURNE n John Gorman Chief Financial Officer MACQUARIE UNIVERSITY n David Pitt Chief Financial Officer MONASH UNIVERSITY n Alastair Sinton Chief Financial Officer AUSTRALIAN NATIONAL UNIVERSITY n Allan Tait Chief Financial Officer UNIVERSITY OF MELBOURNE n Laurence Zanella Treasurer UNIVERSITY OF SYDNEY
MODERATORS n Helen Craig Deputy Editor KANGANEWS n Lucy Symonds Trainee Staff Writer KANGANEWS bond-market DRIVERS classic corporate-funding arrangement, with a global limit and the ability to pick and choose products within this limit. Craig Universities have traditionally sought In 2010 we secured A$450 million (US$344.8 million) in debt financing from their banks or via their global credit exposure in the form of bilateral bank facilities, state governments. Was the driver for using with the option of taking part – or all – of this out in a bond debt capital markets a natural evolution of issue. In the end we issued A$250 million in bonds and kept the existing funding sources or a more active remainder in bank funding to support flexibility going forward. decision by the universities? n Tait I wouldn’t necessarily say our capital-markets driver n Gorman It’s really a variety of reasons, although it’s worth was a bold funding policy, but there were a number of pointing out that although we can lend to New South Wales important considerations. The first is that the amount of Treasury Corporation we’re actually precluded from borrowing capital coming from governments in the last few years from the state. Until 2010, most universities had traditionally has declined significantly. For example, following the borrowed from their banks, and we were no different. financial crisis the Education Innovation Fund provided Historically, universities tended to seek to fill their financing government funding for quite a lot of projects. Many needs in a non-corporate way. But, with a background in universities, including University of Melbourne (Melbourne corporate treasury, I was aware that the range of funding available University), received infrastructure-related funding from the to Macquarie University spanned more than just the bank market. Commonwealth government. This source has dried up more We could theoretically access funding in the domestic MTN, US recently. This is not to say the universities aren’t awarded 144A or US private placement (USPP) markets. funding in other areas – but not for infrastructure. A more recent development has been the fact that There has also been a paradigm shift in the universities’ universities’ credit ratings have surpassed even those of the operating environments, which means there will need to be banks. This implies that universities should theoretically be able a similar shift in the way universities manage their finances to achieve cheaper funding outside the bank market. When I over the next 5-10 years. Universities are now large, global joined Macquarie University, I saw the opportunity to arrange a businesses. With a revenue base in excess of A$2 billion, if
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Australian University Debt Capital Markets Issuance
Pricing month Issuer Type Volume Maturity Coupon Margin Lead Rating Rating (m) year (%) manager(s) Agency August 2010 Macquarie AMTN A$250 2020 6.75 170bp/s-q ANZ, Aa2 Moody’s University swap CommBank April 2014 University of AMTN A$200 2021 4.75 88bp/s-q swap ANZ, NAB Aa1 Moody’s Sydney June 2014 University of AMTN A$250 2021 4.25 80bp/s-q swap ANZ, NAB AA+ S&P Melbourne November 2014 Monash University USPP US$150 2039 ND 120bp/UST NAB NAIC-1 NAIC only August 2015 University of AMTN A$200 2025 3.75 95bp/s-q swap ANZ, NAB Aa1 Moody’s Sydney November 2015 University of USPP US$275 2036 & ND ND JPM, NAB AA+ S&P Melbourne 2046 November 2015 Australian National AMTN A$200 2025 3.98 105bp/s-q ANZ, NAB AA+ S&P University swap
Source: KangaNews April 6 2016
Melbourne University was listed it would be in the top 200 maturities out to 25 years, and this enabled us to better match businesses on the Australian Securities Exchange. liabilities with assets. This tenor is not currently available in the Additionally, we note a more professional approach in the local bank market. financial management of the university sector. This is reflected n Zanella For University of Sydney (Sydney University) it in the treasury teams, which now include people who have was really a mix of these factors, with a clear emphasis on strong corporate-finance backgrounds. Using our experience, diversification and a desire to lock in well-priced, longer-tenor we certainly believe we have established a long-term finance debt. The traditional sweet spot for bank debt has been five strategy for Melbourne University – taking advantage of what years, and accessing debt capital markets provided us with the is a very significant balance sheet. We have assets in excess of opportunity to have various debt lines maturing in different A$6 billion, and leveraging this is key. periods. n Pitt For us it was both an evolution and a desire for n Sinton Following the issuance of an indexed-annuity bond diversification. We have traditionally funded our core capital- in 2003, most subsequent borrowing at the Australian National investment needs using bank funding. This includes research University (ANU) has been through bank debt. and teaching, and the buildings associated with these functions. The decision to pursue MTN issuance was in order to The evolution is that, with a growing number of diversify funding sources and to extend the university’s average international students, we’ve experienced both an increase in debt maturity. We were looking for long tenor, albeit not as demand for infrastructure such as student accommodation long as the USPP market tends to offer – rather something and an increase in revenues to fund such infrastructure. This in the 10-year time frame. So the facts that this maturity was growing need, beyond our core need, is the factor that has available in the domestic market, interest rates are at historical driven our search for other forms of funding – while ensuring lows as well as the opportunity to diversify our funding sources they are appropriate to the type of investment. drove us in the direction of debt capital markets. Issuing Given the strength of the Monash University balance domestic MTNs also enables us to avoid the foreign-exchange sheet, we could simply have gone back to the banks if we had complexities associated with the USPP market. wanted. But we chose capital markets because we believed this way we could access longer tenor than via the bank Symonds Was the decision to access market. For example, our recent USPP transaction contained debt capital markets directly related to
“Roughly two months passed from when we started the process to when we actually issued the bond. This is notably quicker than some of the other university transactions and is likely a product of the fact that the market has become more comfortable with the university sector as an asset class.”
Alastair Sint on A ustralian National University
62|kanganews apr/may 2016 the intended use of proceeds from their the lives of people around the world who have hearing and transactions? language disorders. And we used some funds for the purchase n Baird As others have already alluded to, the driver behind of a small shopping centre adjacent to the university campus. our choice of funding was to enable us to best match asset and n Sinton ANU used the funds from the domestic capital- liability life. The university has a long-dated infrastructure need markets transaction primarily for refinancing bank debt, with and debt capital markets offer longer tenor than we could have the remainder earmarked for other operating requirements achieved in the bank market. including capital expenditure. However, the university currently n Tait It is predominantly infrastructure that underpins our has another funding need and the method of financing is debt strategy. Melbourne University is looking at ways to related to the intended use of proceeds. increase scale – not just in terms of student numbers but The university is exploring interest in outside investment also research capacity and output, industry partnerships and in its student accommodation to help fund an improvement international relationships. This means increasing our numbers and expansion of accommodation and other facilities at of staff and students. Underpinning this is a need for additional the university. The proposal would give investors a 30-year major infrastructure. financial concession, or lease arrangement, over certain There is also competition between universities in terms of student accommodation with the university retaining attracting international students. Student experience is key, so responsibility for operations. it is crucial to ensure the university has cutting-edge facilities to The provision of student accommodation is very provide these students with a first-rate experience. important for ANU for several reasons, including the facts If you look at the best ecosystems for entrepreneurial that the majority of students live away from home and that activity around the world there is always a university-industry the university is primarily based on a large campus in central nexus. Universities will continue to be at the heart of the Canberra. This means it is a vital part of the university Malcolm Turnbull government’s approach to innovation. experience that students get to live as well as study on campus. The research facilities we’re developing, including high-end The project would allow us to fund development of new laboratories and testing facilities, will help us achieve this. accommodation to meet the estimated unmet demand of up Melbourne University has a 10-year capital programme to 1,500 beds, as well as to provide a consistent maintenance in place and generates A$200 million a year in free cash flow. schedule to keep these assets in optimal condition. We have undertaken development work via public-private n Zanella The general theme is that universities are sourcing partnerships and we will continue to use this form of financing funds from the debt markets, whether directly through where appropriate. We will also continue to try to use the right the banks or via capital markets, to fund a large capital kind of debt for projects that meet our targeted rate of return. expenditure spend. n Gorman We identified several separate projects that we The level of building and development described by announced would be funded either in whole or in part by the other university treasuries is also being undertaken by Sydney debt-capital-markets financing. Among these were our hospital University. Since 2010 there have been several large, one-off and clinic, including bringing Cochlear facilities on campus with building projects, including the Charles Perkins centre, the new their global head office and manufacturing facilities. business school, and the need to develop new and upgrade We had already commenced work building a new campus existing student accommodation. library and used some of the funds for this. The library was the The university continues to generate solid operating cash first in Australia to use a state-of-the-art book-retrieval system flows. These come back into the university, but in the last few based on standard modern warehousing technology. The years they haven’t been quite enough to fund the capex need in space efficiency we achieved by building the new library was its entirety. phenomenal – we can fit 3,000 students into the new library It is likely that the universities will continue to have compared with 1,500 previously. reasonably large capex programmes going forward, and that We also undertook to develop Macquarie University’s collectively we will need to continue accessing debt markets for Australian Hearing Hub, which drives innovation to improve a number of years.
“There has been a paradigm shift in the universities’ operating environments, which means there will need to be a similar shift in the way universities manage their finances over the next 5-10 years. Universities are now large, global businesses.”
Allan Tait University of Melbourne
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is to educate, they must also The arrangers’ view: consider funding opportunities in order to maintain a global university conservatism presence, quality facilities and, in turn, attract top-class helps and hinders issuance research staff and students.”
ANZ and National Australia Bank (NAB) have been trailblazers in Scott also points out that the bringing Australian universities to capital markets both at home and in element of conservatism – US private-placement (USPP) format – all seven deals from the sector which helps feed the stable and safe investment profile of since 2010 have had one or both of these banks as a lead manager. The Australian universities – is a key banks share their views on universities’ funding drivers and the process supporting factor for investor of taking them to bond markets. interest in past and future deals.
Ed Waters, executive director oversubscriptions, supported in international students and He tells KangaNews: “Investor of debt capital markets at ANZ by strong credit profiles. differentiated course offerings.” interest in the higher-education in Sydney, tells KangaNews sector remains strong, in that there are two key drivers Brad Scott, head of corporate Internal decisions part due to issuers’ quasi- for universities seeking to raise bond origination at NAB in One of the main challenges sovereign nature, world-class capital in the debt markets – Sydney, says he has been facing further momentum in performance rankings and the diversification of funding “floored” at the level of university issuance is a degree their integral role in society, and the availability of long- demand university deals have of internal reluctance at some while their relative portfolio term money. generated. “USPP investors, institutions about taking on exposure still remains low. As especially, have appreciated the reputational risk perceived an investment proposition, “Bilateral bank loans provide adding to the diversity of to be attached to capital debt investors recognise that short tenor while debt capital their otherwise property- markets. This speaks to the universities are dynamic and markets can provide tenors and utility-heavy Australian modernisation of the university commercial, making them beyond five years – and portfolios,” says Scott. “The sector and its growing role as secure investments.” sometimes as long as 25 penny has really dropped an engine of economic growth and 30 years in offshore with USPP investors about as well as service provision. Scott and Waters both clearly markets,” Waters says. “As a the world-class rankings that believe in the higher-education university grows so does its Australian universities have, Waters admits that one of sector as an ongoing source financing need, and the bond and their similarities with Ivy the main challenges facing of high-quality supply into market provides an attractive League peers is now being universities thinking of capital markets. Universities in platform for universities to acknowledged.” entering debt capital markets Australia have now collectively take advantage of what public is conflicting ideologies. He issued more than A$1.5 billion companies have always been The university sector still explains: “Universities are (US$1.2 billion) equivalent in able to do – recycle capital by accounts for just a handful of traditionally very conservative. domestic and offshore debt terming out debt.” Australian-origin deals, though. Their financial committees capital markets, and Waters And it is clear that local and and board members have very calls this issuer cohort a “new According to ANZ and NAB, the offshore investors remain strong opinions on the activities force” aiding the evolution of the relatively steady succession curious about the place of that universities should Australian bond market. of domestic and USPP Australian universities in the engage in. Fundamentally, a issuance from Australian-origin macroeconomic environment. lot of people believe that the “Seeing new issuers from new universities has placed the role of the university does not categories come to the market higher education sector in good For instance, Scott adds: “In encompass borrowing money.” and being welcomed with solid standing with investors globally. recent years, flagged reforms support proves the market is around how government But Waters says the sector’s changing,” he suggests. “It is The success of transactions to funding and fee charging were sentiment and structural certainly possible that we could date clears the way for return proposed to work at times also outlook are changing. see more universities looking issuance and for new names added another dimension to “Universities are cash-rich to the debt capital markets for to debut. Both domestic and investor analysis, as has the businesses and, although financing, including local and USPP deals have seen multiple sustainability of the growth their fundamental purpose offshore options.”
FUNDING CHOICES by issuing in USPP format we were able to achieve long-term interest rates matching the very steady stream of income from Symonds What led to decisions to opt for student accommodation assets. The objective was also to de- domestic or USPP issuance options? risk future refinancing. We swapped the funds into Australian n Pitt It was quite simply the interest rate and the tenor. Long- dollars immediately upon raising them, thus also eliminating risk term interest rates in the US are currently very favourable, and in exchange rates and interest-rate movements at the same time.
64|kanganews apr/may 2016 It is also fair to say that we weren’t very close at all to issuing It was interesting that as we roadshowed through Asia we in the local capital market. We assess our capital programme in met a number of analysts from the region who had actually terms of core and self-funding capabilities, and the self-funding studied at Macquarie University as international students and nature of student accommodation better matched the depth of were working in the banking industry. tenor available in the USPP market. n Sinton We chose the domestic market for our debut Craig University of Sydney has only issued transaction, because of the ability to access 10-year funds in in the domestic market, and it is the sole Australian dollars. We felt we could achieve a good funding university issuer to have returned to this cost in the local market due to the strong credit rating of the market. Was there notable reverse-enquiry university. demand between the two deals? n Tait Melbourne University has issued in MTN and USPP n Zanella There were solid levels of reverse enquiry, format – with the MTN deal coming first, in mid-2014. As particularly from offshore investors. But it was really the others have said, the general attraction of debt capital markets success of the first domestic transaction that galvanised us into was really the ability to achieve tenor that matched our needs at going back. a cost-effective price. We were confident that there was a market for 10-year Melbourne University was a significant period into university paper and we monitored conditions for the best an existing bank loan that we wanted to refinance with opportunity to bring the follow-up transaction. We just had the domestic deal. For this reason we weren’t looking for to be more patient around execution opportunities, given the very long tenor – just greater than we could achieve via more challenging market compared with when we issued our bank financing, but for the same price. This being our first first bond in 2014. transaction the ease of execution – including the fact that we We felt strongly that we wanted to support the local market didn’t need to set up any interest-rate derivatives and the like – if we could, and this meant bringing a second transaction. We was particularly appealing. are ultimately very pleased that we did. We have some investors However, with debt capital markets experience under our who participated in both deals, which is particularly rewarding. belt and a desire to further smooth out our maturity profile, we elected to issue a USPP deal in November 2015. This time we MARKET ACCESS were seeking much longer financing to match specific liabilities for major new projects. Symonds How long does it take a university Our view of the USPP space was that it can be a very issuer to come to market and what are the long-term, relationship-based market. There is nothing short- particular challenges? term about universities, and matching this philosophy – and n Gorman We priced our transaction in September 2010, Melbourne University’s 163-year history – with the USPP having signed the internal agreements in June. But we actually market was very successful. started the process in September 2009. There were several n Gorman We also looked at the USPP market alongside the reasons we began so early, including the fact that the projects domestic market when we launched our transaction. for which we were seeking funding were due in the third When we accessed markets in 2010 the main consideration quarter of 2010 so we had to have our financing in place by was capacity – both domestically and in the US – given we were then. It was also because universities in Australia are governed from a previously untested sector. We sought advice from our by an act of parliament, and for Macquarie University this also dealers, who confirmed their belief that we could attain the meant seeking approval for the borrowing from the state of minimum A$200 million equivalent volume we were seeking in New South Wales. These restrictions were removed in 2014. either domestic or USPP format. In the end we opted to issue The first stage was really to apply for a rating. We had been locally, given the Asian investor base was active in Australian told early in the process that it wasn’t necessary to seek ratings dollar transactions and there was a level of familiarity with the from two rating agencies, so we assessed Moody’s Investors Australian university sector. Service (Moody’s) against Standard & Poor’s Ratings Services
“USPP investors were interested in the level of dependence on international students and, in particular, where they come from. By and large the US university system hasn’t tapped the international student market to the extent that it plays a large role in Australia.”
David Pitt Mona sh University
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THE FUTURE OF UNIVERSITY ISSUANCE University issuers believe there is little doubt that their debt capital markets deals are illustrative of a transition in the way Australian universities fund themselves. And they say issuance flow will only continue as a result.
n Symonds Four university about availability but more more creative in the way they need to fund infrastructure and deals have priced locally about debt servicing, and the think about their funding mix, development, and raising debt and two in the US private- debt-servicing capabilities of and while this won’t all be via in capital markets is a good placement market in the last universities are increasing. debt I am confident there will alternative funding source. two years. Do issuers see be an increase in the level of these deals as representative Zanella Capex is the driver debt universities take on. A good Gorman For a long time I of a transition in university and student accommodation portion of this will be through have shared Alastair Sinton’s funding strategies? is a big part of this. Many of the debt capital markets. view that, as an institution, universities have significant we are going to receive less Tait Without a doubt. I think active student-housing Sinton I also think the answer government funding over that, given the conversations and campus-improvement has to be, unequivocally, yes. time. So we have to be more around universities becoming programmes. This is a big-ticket Most universities have low proactive in funding ourselves big businesses, in order to item for which universities could gearing. The availability of – either by diversifying our remain competitive the rest rely on debt funding. funding from government own income streams or of Australia’s ‘group of eight’ sources is reasonably tight and accessing capital markets, or a universities will at least need to Baird I am also convinced there is little sign that this will combination of both. start thinking about flexibility more universities will begin ease in the near future, while in their financial-management accessing debt capital markets. the capital-grants programme We are the ninth largest capabilities. It’s not so much Universities will need to become ceased in 2013. Universities university in Australia and, generally speaking, with size comes development cost. There “As an institution, we are going to are some quite large capital receive less government funding costs in the projects in which we over time. So we have to be more are involved, and debt is a good proactive in funding ourselves mechanism for evening out the – either by diversifying our own exposure over time. income streams or accessing capital Pitt There are a number markets, or a combination of both.” of universities whose core teaching and research facilities John Gorman Ma cquarie University
(S&P). Moody’s was the market leader in the education sector was relatively buoyant in the first half of 2014. The was less worldwide, so we elected to seek a rating through Moody’s. lead time for our second issue but we were required to be Once we had a rating in place we sent a request for more patient in finding an execution window – as volatility, proposals (RFP) for banks to lead the transaction, inviting particularly around Greece, was very much in evidence. the four Australian major banks and around half a dozen n Sinton Roughly two months passed from when we started international investment banks. Concurrent with the RFP the process to when we actually issued the bond. This is notably process, we prepared our submission to the state treasury. This quicker than some of the other university transactions and is was approved within about four months. likely a product of the fact that the market has become more n Zanella University of Sydney’s first deal was in April comfortable with the university sector as an asset class. 2014 and our second in August 2015. There was a noticeable The bulk of our preparation time was spent establishing the difference in ease of execution terms between the two. legal documentation for our issuance programme, preparing Ahead of issuing our first bond we carried out considerable for the investor roadshow and in working with S&P to receive a analysis on the local and USPP markets, specifically the benefits formal rating. We mandated the transaction on October 14 last and disadvantages of issuing in each. For the second issue we year, met investors in Asia and Australia over October 26-30 only needed to make a pricing comparison – which was clearly and priced the deal on November 11. in favour of the Australian market. The process was reasonably streamlined – the challenge we Ahead of the first deal there was a six-month preparation faced was also volatility when we were ready to issue. process, including attaining a credit rating and getting internal parties comfortable with the transaction. Timing was less of Craig Carrying out roadshows before issuing an issue in our first transaction, though, as the local market seems to be the norm in this sector. What
66|kanganews apr/may 2016 future uncertainty around government regulation. They were most interested in the differences between the Australian and are approaching an age where start to be keenly competitive the US university systems and in how this might drive student they need major updating. with the US. Monash University is just over demand and funding for research. 50 years old and has a stock The depth of the local market There were also questions around the university as a of physical assets, many of may also be an issue. As more business rather than an institution, in terms of revenue diversity which need refurbishment or universities start to issue, and dependency. We were also questioned around any reliance replacement. which we expect, there may be Australian universities might have on China in terms of student capacity issues around higher- n Craig On the domestic education sector debt. When recruitment. In addition, potential investors were interested in market, to what extent we issued our domestic deal the impact of online and digital disruption. would the availability of it was very straightforward n Pitt The major questions we received on our USPP longer tenor make the local – with final books reaching a roadshow demonstrated the considerable differences between market a more appealing three-times oversubscription. option going forward? There was no problem with the US and Australian education systems. We also received investor interest in 2014, questions around the concept of deregulation – which we were Tait When we come to but who knows what might able to explain that, from a unified ‘group of eight’ perspective, redeem our domestic bond happen if a number of other didn’t pose a greater degree of risk. transaction, in 2021, it may be universities look to access the A typical way of judging how strong a university is in the that spreads and maturities are market as well. such that we will need to look US is to assess the number of applications received for each shorter term again. But I think Pitt If we could access place. We had to explain that it doesn’t quite work this way it’s most likely that our choice 15-year funding in the local given the Australian tertiary admission rank (ATAR) system of funding market will really be market it would make for a – which enables us to just accept applications with an ATAR based on our funding need at much healthier examination the time – and the projects we of the options. At 15 years the score of more than 92. This means we’re already looking at the need to finance. refinancing risks are much top eight per cent of students in the system, and if competition smaller than, say, five-year is high our ATAR target is increased. However, if the domestic tenor. This changes the nature US investors were also interested in the level of dependence market could consistently of the analysis significantly. offer longer tenor it would be We have observed Australian on international students and, in particular, where they come more attractive. In the current superannuation funds entering from. By and large the US university system hasn’t tapped the market I believe we could the debt market with capacity international-student market to the same extent as Australia. achieve 10-year funding – in to provide competitive debt The funds were earmarked for student accommodation, fact, we could access 12-year at 10-15 year tenors locally, and there were questions around the dynamics of this. But we funding. But I think it would which suggests this may be an have to go out to 20 years to achievable goal. noted that creating student beds was good for students as well as for the university, because students who stay in university- owned accommodation are proven to get better results, generally, than those who live off-campus. did the universities learn from this investor n Sinton ANU was well received by investors in both Asia contact? and Australia, with part of the attraction being the scarcity n Baird Having issued in two markets I noticed that the of higher-education issuers. The greatest concentration of respective roadshows were quite different. There were more questions we received was probably around the university’s questions from USPP investors, which really reflected a desire commitment to maintaining its double-A rating. to gain a level of understanding around the Australian higher- The negatives were really focused around the yields on offer education sector and trying to compare it with the US. to investors – this presented the main challenge, particularly n Tait USPP investors had questions around the Australian for those who really liked the quality of the credit. The extra Commonwealth government’s higher-education policy. They yield associated with the longer maturity explained investors’ were interested in the failed deregulation push and potential preference for 10-year duration. •
“Ahead of issuing our first bond we carried out considerable analysis on the local and USPP markets, specifically the benefits and disadvantages of issuing in each. For the second issue we only needed to make a pricing comparison – which was clearly in favour of the Australian market.”
Laurence Zanella University of S ydney
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