Case Study
University System of Maryland
PFM has served as financial advisor to the University System of Maryland since 1994. USM comprises of 11 degree-granting colleges and universities. During its tenure working with the System PFM has advised on transactions totaling approximately $2 billion, including $1.4 billion in issuance sold via competitive sale. PFM closed its last $75 million competitive issue in May 2007, a refunding transaction that generated over $3 million in net present value savings for the System.
Equipment Recycling Program
In 1995, PFM completed a variable rate financing for USM. The $15 million bond issue was the first issuance in a $45 million program, ultimately completed in 1999, which was used to create an internal revolving loan pool for the eleven institutions. The 20-year bonds were issued to fund recycling five-year loans. In 2003 PFM worked with System to restructure is pooled recycling loan program into an auction rate issue. As part of that process, we recommended the use of co-broker dealers to create competition. As a result of the co-broker dealer structure USM has outperformed several other comparable auction rate deals.
Off-Balance Sheet Housing Project
In 1998, the University asked PFM to evaluate the viability of financing $300 million of housing and parking facilities. USM wanted to know if they could afford to increase their debt levels by this amount and still maintain their ratings. In order to assess this possibility, we layered in the debt required to finance these facilities over a three-year period. The analysis indicated that USM would be in violation of their debt policy and could not afford to issue all of the debt on USM's credit.
We recommended a strategy whereby each project would be evaluated for "off balance sheet" financing. Before any project was approved, the rating agencies were apprised of the structure of the transaction and the involvement of the University. We believed that by structuring the off balance sheet debt in concert with the rating agencies would allow us to better determine how much of the debt the ratings analysts were considering "on credit." So far, USM has entered into ground leases for over $400 million of debt issued through the Maryland Economic Development Corporation ("MEDCO").
Most recently, PFM advised on a $33 million transaction at Towson University to finance a student housing facility for first-year students.
Privatization of Utility Infrastructure
In addition to our work with the USM on its various bond financings, leasing arrangements, and other general financing issues, PFM advised USM on the privatization of the utility infrastructure at the College Park campus.
Faced with an aging utility infrastructure, growing campus demand, and revolutionizing electric industry, the USM wanted to see what innovative solutions the private sector could provide. USM requested and received proposals for private entities to take over the utility infrastructure on the College Park campus and provide electric, steam, and chilled water service to the College Park Campus, metered at the building perimeter.
In the wake of the RFP process, USM replaced the ownership of the plant, the operation and maintenance of the facilities, and the management of its employees with a service contract where they will pay for the utilities that are consumed. Through new equipment, innovation, and private sector efficiency, USM anticipates obtaining the benefits of $60 million of capital improvements to the utility infrastructure and a 10-20% reduction in annual utility expenses.
Debt Policies
In 2002, PFM was asked to revisit the USM debt policy. This time we focused upon S&P's concerns regarding overall debt levels. S&P provided a Rating Evaluation Service report for USM wherein they identified three ratios of critical importance. The report specified a limit on these three ratios, which if not exceeded would insure that USM maintained its S&P rating.
PFM constructed a dynamic model for USM that allowed the University to trend forward certain balance sheet numbers critical in calculating these ratios and to simultaneously add additional debt. The percentage increase for each category and the level of debt and interest rates could be adjusted for each of the next ten years, thereby projecting the critical ratios over this ten-year period. In February of 2005, the University received a rating upgrade from Aa3 to Aa2 from Moody's. The System is currently rated Aa2 by Moody's Investors Service, AA by Standard & Poor's, and AA by FitchRatings.
Investment Advisory Work
PFM identified another cost saving opportunity for the System whereby we restructured advance refunding escrow to derive economic benefit from changes in rates after refunding transactions closed to recoup negative arbitrage. PFM conducted six separate escrow restructurings between 2003 and 2005 that realized the System gross benefit of over $2.1 million.