Interest costs hamper UI amid credit crisis

Interest costs hamper UI amid credit crisis

URBANA – The national credit crisis is costing the University of Illinois money – $30,000 to $50,000 a week in interest costs – and forcing the school to restructure some of its short-term debt.

Trustees this week gave administrators broad authority to rework up to $110 million of "variable rate demand bonds" backed by two troubled bond insurance companies.

The bonds are a small portion of the UI's $1.6 billion debt portfolio, most of which is in fixed-rate bonds unaffected by upheaval in the credit markets, said Doug Beckmann, senior associate vice president for business and finance. The university uses money raised by selling the bonds to finance projects on its three campuses.

Banks market the short-term bonds to investors each week, but no one's buying, Beckmann said.

Investors who would ordinarily buy them – money-market fund managers – are staying away because the two insurance firms have lost, or are in danger of losing, their AAA credit ratings. Fidelity Guaranty Insurance Co. already has been downgraded by credit-rating agencies, and Ambac Assurance Corp. was put on negative "credit watch."

The companies lost money on guarantees made to sub-prime rate bonds and other higher-risk investments, and the market doubts their ability to make good on other guarantees, Beckmann said. Ambac recently raised $1.5 billion in new capital, sustaining its AAA rating for now, but investors are still wary, UI officials said.

"The market for our bonds has essentially dried up," Beckmann said.

That has driven up interest rates on the bonds, forcing the university to pay out more, he said.

Interest on about $53 million worth of bonds sold in 2006 to help finance the UI Chicago's south campus redevelopment shot up to 8 percent in late February, compared to a market rate of about 3 percent. With Ambac's recovery, the rate is now about 5.25 percent, he said.

The interest rate on $53 million of bonds sold in 2007 health services facilities, backed by Fidelity, is about 7 percent, he said.

Those few percentage points add up when applied to millions of dollars worth of bonds, Beckmann said.

The university plans to restructure the Fidelity-backed bonds, and possibly those guaranteed by Ambac, and back them with healthier insurance firms or a "letter of credit" from banks that already guarantee the interest part of the equation. Other public agencies across the country have made similar moves, UI Trustee Lawrence Eppley said.

"It's a way to restore trust," Beckmann said.

Trustees agreed to hire seven firms to act as bond counsel, financial adviser, underwriters, verification agent and bond registrar. The transactions will likely cost about $200,000, but that will be offset by lower interest costs, Beckmann said.

The UI's credit has not been affected because it still has the ability to pay the bonds. Most of its $435 million in variable-rate bonds are backed by "solid insurance agencies," he said.

"This is really a pretty small component of our overall debt portfolio, and it's fixable. I don't see anything here we can't overcome," Beckmann said.

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