Yale’s debt is stable

Yale is looking for some extra credit.

After selling $1 billion in bonds late last year, the University will borrow even more — as much as $900 million — by selling bonds to fund construction projects and pay off existing debt some time this year, University President Richard Levin said in an interview Wednesday. Following the Nov. 3 bond sale, the first of its kind since 1996, the new sale would rise up to $400 million to finance ongoing construction projects. The rest of the sale would be used to refinance old debt, bringing Yale’s net total of new debt from the past year up to $1 billion. And it would come as Yale’s endowment managers try to maintain a superior credit rating, which some peer schools are starting to lose.

As with the bonds sold in November, which Yale must repay at an interest rate of 2.9 percent, the new bonds will take advantage of low interest rates — a symptom of the economic recession — to take on debt that can be paid back relatively cheaply.

Yale is able to borrow at such low interest rates mainly because of the triple-A credit rating it has earned from credit agencies, a signal for investors that Yale’s bonds are all but guaranteed to be paid back, explained Jessica Matsumori SOM ’04, an analyst at rating agency Standard & Poor’s who prepared a recent report on Yale.

“[Yale is] a very good credit, notwithstanding the economic circumstances,” said John Griswold ’67, the executive director of the Commonfund Institute, a consulting firm that advises nonprofit endowments, in November.

And it has kept that sterling designation — and with it, the ability to borrow cheaply — despite the mounting its debt has taken on during the recession. Rating agencies consider a variety of financial factors, including long-term financial performance, the size and stability of the institution’s endowment, student enrollment and demand for academic programs and the ability to cope with economic crisis, Matsumori said.

“Our ratings really try to be long-term, looking at how well does that institution respond? How well are they equipped to deal with that investment hit?” she said.

In Yale’s case, the University’s sizeable endowment and its history of strong fundraising and prudent management earned it the highest rating, according to credit reports from Moody’s and S&P. Both reports said Yale’s low admissions rate and high student yield also contributed to its high credit rating because there was no fear that students would stop enrolling and paying tuition.

Any dip in Yale’s rating would result in higher interest rates and fewer funds for the University. At a time when Yale can ill afford to lose any extra money, the University must be especially careful not to take on a debt load that might threaten its top-notch rating, Provost Peter Salovey said.

“A triple-A rating allows us to borrow at the most favorable rates,” Salovey said. “But the irony is that if we take too much advantage of that privilege, we can compromise that rating.”

Indeed, a November 2009 report by another credit agency, Moody’s Investor Service, warned that the University might be downgraded if it suffers further endowment losses and has to run up a massive debt load. The report said the administration’s decision to avoid incurring even more debt by freezing most construction projects was a prudent one.

The current bond sale will finance only construction that was already in the works by the time the market crashed, such as Mores and Ezra Stiles college renovations. Levin announced in January 2009 that all other construction, except when funded by gifts, would be indefinitely delayed.

As colleges sought more credit to shore up falling endowments last year, Moody’s and S&P downgraded the credit ratings of at least five institutions, including Dartmouth College, which was stripped of its triple-A rating in May 2009 partly because of its heavy debt load, according to a June 2009 S&P report on private institutions. S&P also forecasts trouble ahead for triple-A-rated Amherst College and the California Institute of Technology, warning that they may suffer downgrades within the next six months to a year, Matsumori said.

Still, Columbia, Harvard, MIT, Princeton and Stanford, among others, have retained high ratings with stable outlooks even while facing a similar need for borrowing. Harvard sold $400 million in bonds just last week to help pay for a new law school building, among other projects.

Between tuition, research grants, medical services and other sources of revenue, Yale has plenty of ways to repay debt despite the endowment’s 24.6 percent fall, said William Jarvis ’77, the Commonfund Institute’s managing director.

Still, analysts are concerned that the University may not be able to quickly produce enough cash to match all of its debt, according to the reports. With Yale’s many real estate, venture capital and other non-cash assets, Chief Investment Officer David Swensen and his team need to make such liquidity considerations a priority, Matsumori said.

“Yale certainly is not as liquid as some of the institutions we see,” she said.

Swensen did not respond to a request for comment.

At the moment, though, liquidity is not a major concern, Deputy Provost Charles Long said Wednesday.

Salovey said the bond sale has been under discussion at recent meetings of the Yale Corporation, which must approve all new debt, but added that no date has been set for a sale.

Comments

  • The Count

    Debt is debt, “stable” or otherwise.

  • Tanner

    Well thank goodness for that partnership
    with China.

  • jimbob

    It’s an unseemly appearance of a conflict of interest for the S&P analyst covering Yale to report on her B-school alma mater. No wonder Moody’s is more clear-eyed about the situation. The much hyped “Swensen model” produced one of the worst investment performances during the crisis, with the endowment losing nearly a quarter of its value in a single year. This was thanks to an over-exposure to “real assets” and other illiquid, opaque and high-risk alternative investments — the cornerstones of Swensen’s asset allocation. As long as the endowment is treated as if it were a fund of hedge funds, expect a long-term roller coaster ride. Certainly, there must be a better model for nonprofit, tax-exempt institutions.