University issues $1 billion in bonds

The renovations of Morse and Ezra Stiles colleges and the School of Medicine will move forward on schedule, thanks in part to Yale’s sale of about $1 billion in bonds last week.

By issuing these bonds, which carry a relatively low interest rate of 2.9 percent, the University is borrowing approximately another $440 million to fund ongoing renovation projects, University President Richard Levin said. The remaining $560 million refinances some of Yale’s existing debt, converting it to new bonds that have an interest rate that holds steady for five years, which Levin said would reassure cautious investors.

Other universities, including Harvard and Stanford, have also recently issued bonds in an attempt to generate cash for their operating budgets. But Yale’s sale is a rare move for the University, which last issued taxable, fixed-rate bonds in 1996.

The Investments Office has been planning the sale since last December, when administrators realized Yale’s plummeting endowment would no longer support major construction projects, Levin said. With the news that the endowment’s value had dropped by a quarter last winter, administrators were forced to delay all capital projects that could not be funded by donations — except for the renovations of Morse, Stiles and the School of Medicine. In February the Yale Corporation doubled the amount of debt Yale is allowed to issue from $1 billion to $2 billion, clearing the way for last week’s sale.

The University waited to issue the bonds until credit markets, which were frozen because of the economic downturn, opened up again. Cash for construction projects usually comes from a mixture of gifts and borrowing, but lenders would have been hard to come by during last year’s credit crunch, administrators have said.

With investors becoming more willing to buy bonds lately, Yale’s offerings are likely to be popular, said John Griswold ’67, the executive director of the Commonfund Institute, a consulting firm that advises nonprofit endowments.

“They’re a very good credit, notwithstanding the economic circumstances,” Griswold said, citing Yale’s large endowment and many assets. Credit agencies gave Yale’s bonds the highest possible rating, a designation only available to bond issuers with strong credit.

Yale will use the remainder of the bonds to refinance existing debt, Levin said. Proceeds from the bond sales will pay off about $560 million of Yale’s outstanding short-term debt, which existed in the form of short-term loans that were due to be repaid. The University will pay off those short-term bonds using the funds from the sale of the longer-term five-year bonds, he said.

The refinancing will allow Yale to avoid making larger repayments on the bonds if interest rates rise because the five-year bonds are repaid on a fixed interest rate instead of one that fluctuates, Provost Peter Salovey said.

Interest rates are hovering near zero as the government tries to encourage consumer spending and borrowing, so fixing the interest rate on the University’s debt at its current level is a smart move, said William Jarvis ’77, the Commonfund Institute’s managing director.

“[Chief Investment Officer David] Swensen is probably saying, ‘We should lock in this low-rate financing when we can,’ ” Jarvis said, adding that since the government is expected to raise interest rates as the economy gains strength, fixing the interest rate now will eventually save Yale money. This way, Yale will pay a set, low amount of interest to bondholders for all five years, rather than potentially facing higher payments.

Swensen did not respond to two e-mail requests for comment.

Levin said the new, fixed-rate bonds are also more attractive to nervous buyers who wish to avoid bonds whose interest rates could change. The move will help Yale keep its strong credit rating, he added.

Yale used the financial firms Barclays, JP Morgan and Goldman Sachs to oversee the sale of the bonds.

Comments

  • Wow

    2.9%? Wow.

    Good call, esp. if the hyperinflation scenario (or anything like it) comes to pass.

    Simplest scheme: Yale borrows $1B then at some time in the (near) future, rates increase (duh) either because the recession is, indeed, over OR the US dollar is (even further) in the crapper OR both. Then Yale lends $1B (i.e., buys bonds) and rakes in the diff.

    That Yale is issuing bonds indicates to me that Swensen believes (or agrees or thinks not unlikely) that rates will be increasing soon enough–AND perhaps that he does not foresee acceptable risk-adj. returns in equities…

    Dump dollars while you can!

    Whaddya think? Commodities, EM local curr debt, short-term bonds, non-US defensives? A big pile o’ cash?