Storied Cambridge turns to bond market
University of Cambridge is renowned in many areas, but there is one thing the famous British school has never done in its 800-year history - issue bonds.
Now, as the recession dries up donations and batters the university's investment funds, Cambridge is turning to the bond market to help make up the financial shortfall. It plans to raise as much as $600-million in an upcoming issue.
"We usually raise money through benefactors but this time we need a significant sum, so are turning to other methods," Andrew Reid, the university's finance director, told reporters in London. "At the moment we are completely underleveraged."
Several universities around the world, including some in Canada, are coming to similar conclusions and heading to the bond market for the first time in years. Record low interest rates and strong demand from investors for top-quality offerings have provided an added incentive.
Last November, Yale University sold $1-billion (U.S.) worth of bonds at 2.9 per cent, its first offering since 1996. The bonds, which carried a triple-A rating, were snapped up within hours. About half the money raised will fund ongoing projects and the remainder will go toward refinancing other debt. Yale lost 25 per cent on its investments last year, dropping its endowment to $16.3-billion.
Over all, major private universities in the U.S., which include Yale, Harvard and Stanford, sold $5.6-billion worth of bonds last year. That compared to $1.6-billion in 2008 and zero in 2007.
Canadian universities have been facing similar financial troubles and many see bonds as a solution. Universities in this country lost an average of 18.5 per cent in their endowment funds in 2008, or about $2-billion (Canadian) in total, which resulted in cuts to some program spending.
"The [interest] rates are currently very favourable," said Peter Smailes, treasurer of University of British Columbia in Vancouver. The university has tapped capital markets a couple of times through a provincial government agency. The last offering was in 2007 but Mr. Smailes said the university "has requested additional borrowing from the [provincial agency] in fiscal 2010-11."
University of Toronto, the first Canadian campus to use the bond market about a decade ago, is expected to return to the bond market as well. The university suffered a $1.3-billion investment loss on its endowment and pension funds in 2008 and had to cut some spending as a result.
Queen's University, which is looking at financing for roughly $125-million in debt related to capital projects, is also considering a bond issue as one of a range of options, a spokeswoman said.
The Canadian market for university bond issues is relatively small, said Jean-François Godin, a vice-president in fixed income research with Desjardins Securities Inc. in Montreal. The issues generally attract retail investors, he said, who like the slightly higher yield compared with government bonds, and the security offered from the implied government backing.
Murray Griffith, executive director of financial services at University of Victoria, said only a handful of Canadian universities are large enough to issue bonds. "I think you have to have some economies of scale to make it worthwhile," said Mr. Griffith, who added that UVic has no plans to sell bonds.
