Michigan State Sex-Abuse Settlement Bonds Create Buyers' Dilemma

(Bloomberg Opinion) -- Michigan State University is coming to the bond market with a deal that’ll create a major quandary for investors across the country.

The school’s trustees on Friday approved a $500 million settlement with the more than 330 women and girls who were victims of serial sex abuser Larry Nassar. To fund the payments, they’re issuing general revenue bonds. “We are in a position that we can have such a very large bond issue,” Trustee Melanie Foster said, according to the Detroit News, adding that no tuition or state funds will be used to pay for the settlement. The agreement still has to be finalized and approved by a judge.

She’s probably right about the school’s position, even though this will boost its outstanding debt by 50 percent. The Nassar lawsuits did spur Moody’s Investors Service to cut Michigan State’s rating last month to Aa2, the third-highest investment grade. But even if the elevated debt burden led to another downgrade, it’s a large college with a broad array of academic programs. As Moody’s points out, it has ample revenue to pay bondholders.

Still, it’s an open question whether investors will show up for this offering as they would any other. On the one hand, the proceeds will compensate Nassar’s victims, and that’s a good thing. But for a buyer with any number of bonds to choose from, does that outweigh the stigma attached to Michigan State, and this deal in particular? The funds collected will be distributed to the right people, but that doesn’t erase the fact that these securities will exist because of horrible crimes committed under the guise of medical treatment.

Investors will have some time to think it over. Bloomberg News’s Martin Z. Braun got more details on the sale from school officials.

The bonds will be issued within 30 days after the settlement agreement is finalized, Mark Haas, the university’s vice president for finance and treasurer, said in an email. However, the university expects insurers to help cover the claims, offsetting the increase in debt, Haas wrote. The university is still in discussions with insurers, he said.

“We are working hard with the plaintiffs to finalize as soon as practical," he wrote.

While it’s not unprecedented for bonds to pay legal settlements, you’d be hard-pressed to come up with a deal so interwoven with such a high-profile criminal case. The sale should go through — remember, the proceeds are going to the victims — but it’s difficult to conceive of a scenario in which investors are lining up to lend money to the institution where at least 14 representatives received reports of Nassar’s crimes over the course of two decades before his arrest. And the university's interim president remains under fire for emails that surfaced showing him disparaging victims and their lawyers.

In that sense, it’s a test of the fixed-income adage that “there is no such thing as a bad bond, just a bad price.”

Michigan State will likely have to pay up to borrow — and maybe by a lot. As it should, given the school’s role in Nassar’s crimes. But the market, as it almost always does, will find a clearing point. And, hopefully, the victims will get some closure and can move forward.

©2018 Bloomberg L.P.

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