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$2B elephant in the dorm room

Outstanding debt loads provide costly obstacle to N.J. university reorganization

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Rutgers and Rowan universities and UMDNJ have more than $2 billion in outstanding debt combined, and the restrictions and prohibitions in bond contracts could present costly obstacles to any realignment of the schools.

"The concerns that you would have: Can you get rid of a substantial asset, or do their bond documents prohibit that; and were any of the facilities that are being given to Rowan actually financed with the proceeds of the bonds?" said Kenneth A. Peterson Jr., a partner specializing in finance at K&L Gates LLP who is based in the law firm's Chicago office.

The debt could be refinanced, if necessary, in a number of ways, according to experts. If Rutgers' bond contracts do include restrictions or prohibitions on the transfer of assets, the university will need to consider its options on the specifics. That might include addressing bondholders' rights and any demands those investors might make, and payments of penalties or even forced bond redemptions — paying off the bonds fully, said Patricia Kane Williams, a public finance attorney who worked at Duane Morris LLP and other firms before setting up her own shop in Haddonfield.

For bonds within contracts' "no-call periods" — usually the first 10 years after issuance, when they can't be paid off without a penalty — the university could "defease" those bonds, Williams said. Defeasance involves the process of doing a second financing and using those proceeds to buy government securities to be placed in escrow and used to pay the debt service on the old bonds until it is paid off.

A draft report prepared by North Jersey legislators and leaked to the media last week calls for the University of Medicine & Dentistry of New Jersey's and University Hospital's outstanding debt, said to be $662 million, to be defeased as part of reorganization to address financial challenges.

Moody's listed UMDNJ's outstanding debt at $668 million and Rowan's as $517 million as of 2011 fiscal yearend. Rutgers, in its financial report for the year ended June 30, 2011, listed more than $973 million in outstanding bonds, much of it issued over the past decade. Current amounts are likely lower because of debt service payments made since last June.

Peterson said it's important to have financing options, rather than to be forced into taking a certain course to avoid a default.

"It's one thing to choose to defease, it's another to say we have to defease because we have problems with our bond documents that would prohibit us from doing the transaction," Peterson said.

How to handle the debt is an important question. Moody's Investor Service said in a February report that the lack of details about a possible merger's mechanisms for asset transfer, asset value and disposition of debt leave questions about the institutions' credit ratings, which influence an institution's borrowing costs, like bonds' interest rates.

Also, it's difficult to judge what the costs might be to refinance Rutgers' bonds, since many variables, such as investors' desire for new debt and interest rates, come into play, finance professionals said. NJBIZ spoke with other public finance experts who said existing relationships with institutions prevented them from speaking publicly on the issue. The general consensus among experts was that addressing debt issues will cost unknown millions, including legal and underwriting fees. However, Peterson said an entity could actually save money if it could sell new debt at low enough interest rates.

The university's due diligence report on the proposed merger, which would give a more complete picture of whether the bonds would need to be refinanced and at what cost, was to be completed last week by investment bank Cain Brothers & Co. LLC, according to Rutgers sources who asked not to be named.

According to Rutgers spokesman Greg Trevor, the due diligence process is progressing.

"We expect that when it is complete, it will identify and quantify all of the potential costs and debt arising from the proposal, and options on how those obligations might best be addressed," Trevor said in an e-mail.

Trevor said he did not have details on when the report would be completed or if it would be released to the public.

Rutgers successfully has used the refinancing process in the past, according to its 2011 financial report. For example, in March 2007, the university completed advance refunding — issuing new debt to pay off older ones — of general obligation bonds issued in 1997, and reduced total debt service payments over 20 years of the bonds' life by $5.6 million, according to its 2010-11 financial report.

Kevin Roberts, a spokesman for Gov. Chris Christie's office, said the administration anticipates financial and other issues pertaining to the reorganization will be resolved, and the reorganization will move forward.

"As we have noted often throughout this process, the schools involved in these discussions, in conjunction with the administration, are confronting various issues and are working diligently to solve them, including those related to complicated debt-related matters — not only at Rutgers, but also at the other institutions involved in the reorganization," Roberts said in an e-mail.

E-mail to: ktarbous@njbiz.com
On Twitter: @KenTarbous

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