University of Michigan
General Revenue Bonds, Series 2022D
March 10, 2022
The proceeds of the Bonds will be used to refund the University’s outstanding Series 2012E variable rate bonds and pay costs of issuance.
The fixed rate transaction was structured with annual principal maturing April 1, 2023 through 2033 and is subject to optional redemption at 100 on April 1, 2032. SWS structured the transaction with 5% coupons to enhance market liquidity for the Bonds and attract a broad range of potential investors. Despite volatility in the tax-exempt market, with MMD rising 5 to 7 basis points on the day of pricing, SWS tightened spreads by 2bps in 2025 and 2bps and 3bps in 2032 and 2033, respectively.
The transaction was well received attracting over $108 million in priority orders from 18 unique institutional investors. Leading up to pricing, the market was extremely volatile. Over just three days (Monday, March 7thto Wednesday, March 9th) 10-Year Interpolated April ‘AAA’ MMD increased 10bps to 1.76%. On the day of pricing, Thursday, March 10th, Interpolated April ‘AAA’ MMD continued to rise as investors reacted to the Russian invasion of Ukraine. 10-Year Interpolated April ‘AAA’ MMD increased an additional 5bps closing at 1.81%.
The POS and Investor Presentation posted nine (9) days prior to pricing and were viewed by 54 unique investors. The University’s strong credit characteristics were an important factor to investor sentiment and their overall desire to participate in the transaction despite market volatility.
The Series 2022D bonds were well received in the market with a total of $108.06 million orders from a mix of investors including bond funds, SMA’s, bank portfolios, insurance companies, among others. Subscription levels ranged from 0.8x to a high of 3.6x for the 4/1/2033 maturity. Strong investor interest, despite large cuts in MMD the day of pricing, allowed SWS to tighten spreads by 2bps in 2025 and 2bps and 3bps in 2032 and 2033, respectively.
On Thursday, February 24th, Russia invaded Ukraine, jolting worldwide financial markets. There was a “flight to quality”with Investors seeking safety in US Treasuries driving the 10-year Treasury yield to 1.72% on Friday, March 1st.
Prior to the invasion, tax-exempt ‘AAA’ MMD rates had been ticking upward in 2022 as investors priced in the expectation of rates hikes by the Federal Reserve (4 to 7 anticipated by Wall Street). Russian’s invasion of Ukraine added additional volatility into the market with ‘AAA’ MMD increasing as much as 10bps and decreasing by as much as 8bps. During the week leading up to pricing, investors withdrew approximately $3.5 billion from municipal bond mutual funds.
With market volatility continuing into Thursday, March 10th, SWS successfully priced the University’s Series 2022D bonds while decreasing spreads in 2025, 2032 and 2033 (see Pricing Progression on following page). The transaction priced at a low All-In TIC of 2.03% (April 1, 2033 final maturity).