Harvard Borrowing $400 Million to Aid Scaled-Back Expansion
2010-01-12 05:01:00.11 GMT

By Michael McDonald and Jeremy R. Cooke
Jan. 12 (Bloomberg) — Harvard University, which has almost
doubled its debt burden in three years, begins selling about
$400 million of tax-exempt bonds today as it finances part of a
scaled-back campus expansion plan.
Harvard, the world’s richest college, will use the proceeds
to finance capital projects including a new law school building
in Cambridge, Massachusetts, preliminary offering documents
show. The university also intends to refinance a portion of its
debt, which totals more than $6 billion, and pay off commercial
paper.
“This is a good time for a blue-chip, high-grade credit to
come to market,” said Peter Delahunt, a senior vice president
who oversees municipal bond sales at Raymond James & Associates
Inc. in New York. Harvard’s expanded borrowing in the past three
years will be outweighed by the demand for a credit of the
“highest reputation,” he said.
The university has kept its top ratings from Standard &
Poor’s and Moody’s Investors Service, even after its endowment
fell 30 percent and Harvard agreed to pay banks almost
$1 billion to get out of financing contracts associated with
its expansion ambitions. The Internal Revenue Service will be
auditing the college as one of 40 whose non-profit status is
being reviewed this year.
Bonds that Harvard sold in December 2008, set to pay 5.5
percent and mature in 2036, traded last week at a price-to-yield
of 3.9 percent, 53 basis points, or 0.53 percentage point, less
than an index of top-rated municipal bonds due in 25 years, data
compiled by Bloomberg show. When they were issued, the yield the
university agreed to pay was 15 basis points more than the
Bloomberg index.

Tax Exempt

Tax-exempt bonds posted their best annual performance since
2000 last year, returning 14.5 percent, according to the BofA
Merrill Lynch Municipal Master Index, as demand for the debt
overwhelmed a more-limited supply, Delahunt said.
Yields on top-rated tax-exempt bonds due in 10 years held
at a seven-week high of 3.09 percent yesterday, according to a
daily survey by Municipal Market Advisors, a Concord,
Massachusetts-based research firm.
Harvard was planning to put $1 billion a year into capital
spending, with 80 percent of that financed with debt, before it
lost about a third of its endowment, Moody’s said.
Drew Faust, the university’s president, said Dec. 10 that
Harvard will suspend work early this year on a $1 billion
science center in Allston, the centerpiece of a campus expansion
across the Charles River.
The value of the endowment, which is overseen by Harvard
Management Co., fell to about $26 billion in the 12 months that
ended June 30, from a peak of $36.9 billion in 2008.

Interest-Rate Swaps

Harvard sold $2.5 billion of bonds in December 2008 amid
the credit crisis, using $500 million to exit $1.1 billion of
interest-rate swap contracts, most of them tied to securities it
planned to sell for the campus expansion. Separately, the school
agreed to pay $425 million in the next 40 years to JPMorgan
Chase & Co. to terminate another $764 million of swaps that were
supposed to lock in rates for bonds for Allston.
Officials disclosed in their latest bond documents that
Harvard is to be audited this year as part of an IRS review of
the tax-exempt status of colleges and universities. The school
said in the documents it “has no reason to believe that the
examination will have an adverse effect on the tax-exempt status
of the university or any other aspect of the university’s
operations.”
John Longbrake, a Harvard spokesman, declined to comment on
the IRS examination. Bruce Friedland, an IRS spokesman, also
declined to comment.

Growing Debt Load

Harvard will have $6.5 billion of debt after this week’s
debt sale, a 71 percent increase from three years ago, Moody’s
said in a Jan. 8 report. The school plans to borrow no more than
$1 billion over the next three years to finance additional
capital projects, the New York-based rating company said.
“One of the university’s credit strengths is its ability
to slow or accelerate capital spending in the context of its
financial position,” Moody’s analysts led by Roger Goodman said
in the report.
Harvard’s debt load is comparable in size to the amount of
general obligation bonds that the city of Chicago will have
outstanding after its offering of about $773 million this week,
Moody’s said. Chicago, the third-largest U.S. city by population
after New York and Los Angeles, is rated Aa3, three levels lower
than Harvard’s Aaa.
The university is selling securities with maturities
ranging from 2013 to 2034, the offering documents show. Barclays
Plc is heading a group of five investment banks marketing the
bonds to individual investors today and institutions such as
mutual funds tomorrow. Massachusetts’s Health and Educational
Facilities Authority is issuing the debt for Harvard.
States, local governments and other municipal issuers plan
to sell about $11.1 billion of fixed-rate bonds this week, 50
percent more than the $7.4 billion issued last week, Bloomberg
data show. About $2 billion will be taxable securities.
Following are descriptions of additional pending sales of
municipal bonds in the U.S.