Texas A&M Mulls Taxable Debt for Stadium: Muni Credit

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Texas A&M University, Governor Rick Perry’s alma mater, may join the biggest wave of taxable municipal-bond sales since 2010 to help finance the costliest stadium project in U.S. collegiate sports.

The 137-year-old school expects to sell as much as $320 million of 30-year bonds later in 2013 for a $450 million project, less than a year after finishing fifth in the Associated Press national college football poll. Led by Heisman Trophy-winning quarterback Johnny Manziel, it was the school’s best showing in more than five decades. The school is considering both taxable and tax-free debt, said Steve Moore, a vice chancellor.

Even after the steepest quarterly losses in taxable munis since at least 2009, localities issued $20.1 billion of the securities in the first half of 2013, up 57 percent from a year earlier, data compiled by Bloomberg show. For Texas A&M, the expansion reflects the state’s oil-driven wealth and a boom in spending on college football. Money from television rights contracts has doubled in the past four years for schools in Texas A&M’s Southeastern Conference.

“Support for Texas A&M football is so strong that there’s very little chance that their bonds would face problems,” said William Sirakos, a senior executive vice president at Cullen/Frost Bankers Inc. (CFR) in San Antonio, who manages $9 billion including the school’s bonds. “There will be tremendous demand.”

California Leads

Led by schools in California, U.S. colleges have taken on about $12 billion of muni debt this year, after $22.8 billion in 2012, the most since 2010, Bloomberg data show. The University of California and New Jersey’s Rutgers University have already sold taxable municipal debt this year.

Texas A&M is based in College Station, about 95 miles (153 kilometers) northwest of Houston. It is rated AAA by Moody’s Investors service, the highest mark, and AA+ by Standard & Poor’s, one step below.

The stadium bonds won’t be backed by the state’s Permanent University Fund, which requires an educational purpose. Issuing taxable bonds would allow Texas A&M to use the stadium for other purposes, according to Sherylon Carroll, a spokeswoman for the school.

In a sale last month of tax-exempt revenue debt that was backed by the fund, a 10-year segment was priced to yield 2.3 percent, about 0.06 percentage point above benchmark securities, data compiled by Bloomberg show.

Seat Cash

While the new bonds won’t have the state fund’s backing, they will be repaid by seat-licensing revenue and donations.

Seating at the refurbished stadium will rise by 24 percent to 102,500 when completed in mid-2015. Attendance averaged about 87,000 the past two years, ranking 11th nationally last year, Carroll said. About 5,000 were in temporary or standing-room-only seats.

Texas A&M expects to collect about $232 million from seat licenses over five years. Donors have committed to lease all but two of 144 suites, Carroll said. While Texas A&M hasn’t disclosed terms for the largest suites, which have sold out, the next-priciest tier requires a one-time donation of at least $1 million.

Suite holders must also make annual contributions of $80,000 to $100,000, she said. Tickets for the six to eight annual home games cost another $75 or more per seat in each suite.

Renewal Reliability

More than 98 percent of the 45,000 season-ticket holders renewed for the 2013 season, Carroll said.

“Generally, stadium bonds aren’t looked upon favorably because expectations are usually greater than the reality,” said Dick Berry, a portfolio manager at Brasada Capital Management LP in Houston, which manages $135 million in munis. “But for A&M, and a few other schools like Alabama and the University of Texas, you can’t build a stadium big enough to meet demand.”

The stadium project also taps the university’s 50,000 students, whose fees will increase by $72 a year in 2014. On top of that, prices that students pay for football season tickets will also rise. About 31,000 seats are reserved for students.

Football is a tradition at Texas A&M, which opened in 1876, and required students to take military training courses until 1965.

Perry, a Republican who first took office in 2000, graduated from the school in 1972 as an animal-science major, according to the governor’s website. He was also a “yell leader” who revved up crowds during games. Other Aggie graduates include singer Lyle Lovett and oilman George Mitchell, a pioneer of hydraulic fracturing, which frees natural gas trapped in shale deposits.

Alumni Largess

The expansion is well-timed because many alumni with petroleum engineering and geology degrees are prospering in oil and gas production, said Charles Neinas, a consultant in Boulder, Colorado. As executive director of the College Football Association, he negotiated TV contracts for universities from 1984 to 1995.

“Not every state is as fortunate as Texas,” he said. Texas is the nation’s biggest energy-producing state.

Wealthy individuals, rather than corporations, have bought most of the suites, said Hunter Goodwin, chairman of the local tourism bureau board. A former Aggie football player, he is part-owner of three hotels in the College Station area.

‘Irrational Exuberance’

“There’s some irrational exuberance in the marketplace which happens with every stadium, and people are intoxicated by the big season we had last year,” said Goodwin, who played in the National Football League for nine seasons. “The timing couldn’t be any better to leverage all of that excitement.”

Dan A. Hughes Co., a closely held oil- and gas-exploration company in Beeville, Texas, has owned a suite since 1999, said founder Dan Hughes, 83, who graduated in 1951 with a geology degree.

“I’m all for the expansion,” he said. “My education at A&M gave me the blocks to succeed.”

Southeastern Conference schools received, on average, about $20.7 million from television rights in 2012-13, compared with about $11 million in 2009, according to statements from the group. A new network, set to start airing 45 football games in 2014, will add to the cash flow.

The most expensive U.S. college sports project is the University of California’s $321 million Memorial Stadium renovation in 2012, according to a report Texas A&M filed with a state education agency.

Texas A&M expects to collect $125 million in private gifts related to the project, according to Carroll.

Deduction Option

Donors can deduct 80 percent of their seat-license expenses under Internal Revenue Service rules, said John Colombo, a law professor at the University of Illinois in Champaign who studies taxation.

Stadium improvements don’t always lead to on-field success.

The University of Tennessee, which spent $125 million expanding Neyland Stadium from 2004 to 2010, has had three straight losing seasons.

In the $3.7 trillion municipal market this week, issuers, including Utah and the city of Dallas, are set to offer a combined $7.4 billion of debt. That’s about double the total in the previous week, in which trading was shortened by the market’s closing for Independence Day on July 4.

Benchmark municipal securities maturing in 10 years yield about 2.7 percent after the interest rate reached 2.96 percent last month, the highest since April 2011, according to Bloomberg data. The ratio of the yields of these munis to 10-year U.S. Treasuries, a gauge of relative value, is about 98.3 percent, the lowest since June 21, Bloomberg data show. The average since 2001 is about 92 percent. A higher percentage means local debt is cheaper relative to federal obligations.

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