September 25-26, 2003

ITEM 120-2011-R0903                Authorization to Utilize Multi-Modal Variable and Fixed� Rate Debt Instruments, Series G 2003 Facilities Revenue Refunding Bond Issue; Montana State University

THAT:�������������������������������������� The Board of Regents of the Montana University System adopts the Supplemental Bond Resolution for the Series G 2003 Revenue Bonds for Montana State University and authorizes Montana State University and the Commissioner of Higher Education of the Montana University System to utilize Multi-Modal Variable Rate Debt Instruments, and/or a Fixed Rate Debt instrument, for the issuance of these bonds.

Montana State University‑Bozeman

Facilities Revenue Refunding Bonds������������� $20,500,000


EXPLANATION:����������������������� At its July 10 meeting the Board of Regents authorized Montana State University to proceed with the issuance of the Series G 2003 Facilities Revenue Refunding Bonds.


This action currently proposed for Regent approval will authorize Montana State University to utilize debt financing alternatives, other than merely a fixed rate bond issue, in order to complete the proposed refunding transaction.


When the University's refunding proposal was prepared (in early June) for Board of Regent Review, fixed rate bonds were at a very attractive level that would have provided savings of well over $1,500,000, or nearly 10 percent of the issue's principal.� But, by the time that all official documents were finalized for the sale, fixed term interest rates had increased substantially, which reduced the University's projected savings to significantly less than $400,000, or about 2 percent.


Immediately following the July meeting of the Board of Regents, the University met with officials from both Moody's and Standard and Poor's credit rating agencies.� As a result, Moody's upgraded MSU's credit rating from A3 to A2 and gave the University a Positive Outlook report for the future.� However, soon after that the University decided to delay its refunding issue because the percentage of savings from a fixed rate bond issue did not seem sufficient to justify the transaction.


Given current market conditions, the University still has the opportunity to enjoy significant savings from a refunding, by employing one or more variable rate debt financing instruments.


The current interest rate for variable rate debt financing is at about 1.00%; and, the 10-year average for these rates is about 3.00%.� Yet, even if the (All In) interest rate for this proposed transaction averaged 3.5% over the life of the bonds, the University's (Net PV) savings would still be $1,084,285.


With this authorization, the University could complete its proposed refunding through an initial placement with a variable rate debt instrument, which would then provide the opportunity to remain in a variable rate mode, or later shift into a fixed rate agreement.


ATTACHMENTS:���������������������� The attachments provide a comprehensive presentation of the following:


1.�� A description of Multi-Modal Debt Financing instruments.

2.�� An overview of Fixed, and Short Term, interest rate trends.

3.�� A projection of potential refunding savings for the term of the issue, as well as a rates/saving sensitivity analysis.

4.�� An overview of potential risks, and how they will be addressed.

5.�� A summary of the University's debt financing business plan and special reserve provisions.

6.�� The Supplemental Bond Resolution.