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Harvard's $2 Billion bond offering

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fall09
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Harvard's $2 Billion bond offering [#permalink] New post   05 Dec 2008, 12:54
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A taxable bond deal that could reach $2 billion for Harvard University is being shown around the Street by lead underwriter Goldman Sachs & Co.

The deal and another $600 million tax-exempt issue planned for the university next week comes just days after Harvard reported that its endowment fund suffered investment loses of at least 22% in the first four months of the school's fiscal year.

The size of the taxable offering hasn't been set in stone yet, but a source familiar with the matter said it could reach $2 billion, depending on the volume of orders received.

The deal tentatively has three maturities - $500 million each in five and 10 years and $1 billion in 30 years - each priced at 337.5 basis points over comparable Treasurys, according to the source. Based on recent prices, that would leave the 30-year with a return around 6.41%.




Can anyone explain why Harvard is doing this?Are they raising money to provide scholarships since their endowment went down by $8 billion to $37 billion?

Is this something Harvard does every yr? Are other univs going to follow suit?
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Re: Harvard's $2 Billion bond offering [#permalink] New post   05 Dec 2008, 13:19
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A lot of the endowment is illiquid, and in hedge funds and Private Equity. So they can't get the cash out, and - better still - if they ask for a price on a lot of it, especially the PE stuff, they will have to mark it to market and take an even bigger hit.

It is hardly like it is difficult for them to raise funds - I think it is a liquidity thing.
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Re: Harvard's $2 Billion bond offering [#permalink] New post   05 Dec 2008, 12:56
Interesting find. I'm not familiar with how university finances work, but look forward to other's responses and analysis. I always figured that they just had a huge surplus and had no idea how to spend it all or put it to use.
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Re: Harvard's $2 Billion bond offering [#permalink] New post   05 Dec 2008, 13:02
agold wrote:
Interesting find. I'm not familiar with how university finances work, but look forward to other's responses and analysis. I always figured that they just had a huge surplus and had no idea how to spend it all or put it to use.


They manage the endowment by themselves.PIMCO's Mohamad El Erian led the edowment for sometime last yr.The endowment invests in a mix of securities such as stocks,bonds and private equity funds.
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Re: Harvard's $2 Billion bond offering [#permalink] New post   05 Dec 2008, 13:06
If they think that they can get a return higher than 6.41% over 30 years , it makes perfect sense. It looks like some of it is tax exempt so the yield will even be lower. That would make sense to issue debt with these levels and keep your cash for investments.
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Re: Harvard's $2 Billion bond offering [#permalink] New post   05 Dec 2008, 13:27
337.5bps over comparable Treasuries, is this even Investment Grade? What's a good place to check current corporate spreads?
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Re: Harvard's $2 Billion bond offering [#permalink] New post   05 Dec 2008, 13:32
Yup, it is. HG spread have widened significantly. Lehman Credit index spread is around 600 bps right now, partially due to corp bond goind down and especially due to treasuries tightening.
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Re: Harvard's $2 Billion bond offering [#permalink] New post   05 Dec 2008, 13:37
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Harvard is the country's richest university. Its endowment fell about $8 billion to $36.9 billion at June 30, indicating that the worsening economy and drumtight credit markets are now affecting the endowment world. Its bonds are nonetheless considered solid credits.

The tax-exempt offering would be brought through underwriters headed by J.P. Morgan Securities, and the issuer would be the Massachusetts Health and Educational Facilities Authority. Those securities would be used to redeem a portion of outstanding debt obligations and to terminate certain interest rate swap agreements.
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Re: Harvard's $2 Billion bond offering [#permalink] New post   05 Dec 2008, 13:54
i think their cash flow cannot offset their capital development costs, so they need to tap in to commercial paper markets to cover their costs..however, this also an indication they are trying to raise money through this vehicle, cause everyone expects the bond market to tank in the coming days..so why not take advantage of it..
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Re: Harvard's $2 Billion bond offering [#permalink] New post   05 Dec 2008, 14:14
raising debt to cancel interest rate swap agreements? ouch.
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Re: Harvard's $2 Billion bond offering [#permalink] New post   05 Dec 2008, 19:39
Excellent point 3under. That is EXACTLY how I see it.

3underscore wrote:
A lot of the endowment is illiquid, and in hedge funds and Private Equity. So they can't get the cash out, and - better still - if they ask for a price on a lot of it, especially the PE stuff, they will have to mark it to market and take an even bigger hit.

It is hardly like it is difficult for them to raise funds - I think it is a liquidity thing.
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Re: Harvard's $2 Billion bond offering [#permalink] New post   05 Dec 2008, 22:32
Wait:
"Those securities would be used to redeem a portion of outstanding debt obligations and to terminate certain interest rate swap agreements."

Both together result in a Floating Rate Note, nothing new. Instead of taking Fixed Income risk, Harvard was in Libor risk, now it wants to take advantage of low rates and refinance, perhaps now incurring Fixed Income risks.

I'm not following the markets these days, so I don't know how the TED spread is, but if it is tighter than it was a couple of weeks ago, it may make sense this strategy that I described. Disclaimer: I'm assuming that the Interest Rate Swaps are hedging Harvard's obligations.
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Re: Harvard's $2 Billion bond offering [#permalink]
05 Dec 2008, 22:32

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