Yale Beats Harvard in 15-Year Bond Sales on Connecticut Demand

Feb. 10 (Bloomberg) -- Yale University, the top-rated Ivy League school founded in 1701, won lower 15-year tax-exempt yields than Harvard University, also ranked AAA, thanks in part to demand from its home state of Connecticut.

New Haven-based Yale, whose endowment ranks second only to Harvard in the U.S., sold bonds due in July 2025 at a price to yield 3.35 percent yesterday, while another AAA institution, the University of Michigan in Ann Arbor, drew 3.59 percent on similar debt. Harvard, based in Cambridge, Massachusetts, got 3.46 percent last month on December 2025 securities that last traded on Feb. 4 at 3.41 percent. All of the debt can be bought back in eight to 10 years.

Connecticut is wealthier per capita than Massachusetts and Michigan and its higher income tax rates help boost demand for tax-free municipal bonds in a state where supply has been relatively sparse, according to Fred Yosca, head of fixed-income trading at BNY Mellon Capital Markets LLC in New York.

“Not only is it an Ivy League credit, it is Connecticut tax-exempt,” Yosca said. “There’s never any Connecticut paper around anymore.”

Fixed-rate municipal sales by Connecticut issuers fell 24 percent to $352 million this year through last week, while offerings in Massachusetts rose 70 percent to $1.28 billion in the same period, according to data compiled by Bloomberg. Michigan muni deals fell 45 percent to $332 million during the first five weeks of 2010, the data show.

Income, Taxes

Connecticut has the highest personal income per capita at $54,117, based on 2007 data from the U.S. Census Bureau, and a top income tax rate of 6.5 percent, compared with 5.3 percent in Massachusetts and 4.35 percent in Michigan.

Yale, which cut capital spending 60 percent after endowment losses, sold $530 million of tax-exempt bonds and wrapped up the offering a day sooner than planned. Underwriters led by Barclays Plc handled the deal, which was issued through Connecticut’s Health and Educational Facilities Authority.

The private nonprofit university found enough demand to raise the price and cut the yield on the $80 million in 15-year bonds by four basis points from 3.39 percent. Yale also sold $150 million of 30-year bonds priced to yield 4.24 percent.

The balance of the transaction was 39-year bonds with so- called mandatory tender provisions that allow Yale to buy them back and change the rates. Investors in $150 million were offered a 1.05 percent yield through 2013, and buyers of another $150 million get 1.77 percent through 2015.

Big Endowments

“Universities with big endowments have been trading very well,” Yosca said. “They’re still perceived to be blue-chip credits.”

Michigan, the state’s oldest university, sold $184.2 million of AAA tax-exempt bonds yesterday through a round of competitive bidding among investment banks won by Bank of America Merrill Lynch. Ten-year bonds had a yield of 3.01 percent.

Yale is using most of the proceeds from its deal to finish campus construction projects as part of a $600 million capital program for the year ending June 30, a record level of spending. The university will cut its capital program to $250 million next year.

The school’s endowment fell to $16.3 billion from $22.9 billion in the 12 months ended June 30. Yale will delay as much as $2 billion in capital projects over the next five years, university President Richard Levin said in a letter a year ago. Tom Conroy, a Yale spokesman, confirmed the capital spending cuts this week and declined further comment.

Suspended Work

Harvard suspended work early this year on a $1 billion science center after the value of its endowment fell to about $26 billion in the 12 months ended June 30, from a peak of $36.9 billion in 2008. The university may cut its annual capital spending in half to $500 million, according to a 2009 report from Moody’s Investors Service.

Higher-education endowments lost on average 18.7 percent in the year ended June 30, according to the National Association of College and University Business Officers. The losses are forcing the institutions to rein in building programs after boosting long-term debt by 54 percent in fiscal 2009, according to a survey of 842 of the institutions released Jan. 28.

The highest rated tax-exempt university bonds are sometimes so popular they come to market at yields less than those on some top-rated state and local debt. Georgia bonds rated AAA, due in March 2025 and callable in 2019, traded yesterday at a price to yield 3.47 percent, Municipal Securities Rulemaking Board data show.

Slower Pace

Yale may also have benefited from expectations for a slower pace of bond sales in coming weeks than when Harvard borrowed, said Dexter Torres, head trader at fixed-income manager Samson Capital Advisors in New York. The Bloomberg Municipal 30-Day Visible Supply Index fell to $8.6 billion from $14.1 billion Jan. 13.

“There was a heavier supply calendar the week that the Harvard deal came, so that deal had more competition,” Ashton Goodfield, head of muni trading at DWS Investments in Boston, said in an e-mail. “With Yale, the 15-year term sold at narrower spreads than the 30-year term. This reflects the strong interest for high-quality names in the intermediate part of the curve, from both retail and institutional buyers.”

Benchmark tax-exempt yields were little changed today, according to a daily survey by Municipal Market Advisors of Concord, Massachusetts. Ten-year bonds held at 3.04 percent.

Virginia’s Public Building Authority, which helps the 12th- most populous U.S. state finance capital projects, auctioned $256.7 million of taxable, federally subsidized Build America Bonds through JPMorgan Chase & Co. and $60.5 million of tax- exempt debt through Wells Fargo & Co.’s Wachovia Bank.

Hawaii, the youngest state, today released details of debt offerings made Feb. 9. Banks led by Citigroup Inc. negotiated the sale of $500 million in Build America Bonds and $221.6 million of tax-exempts.

To contact the reporters on this story: Jeremy R. Cooke in New York at jcooke8@bloomberg.net; Michael McDonald in Boston at mmcdonald10@bloomberg.net.