Duke Joins Harvard as Colleges Buy Back Credit-Crisis Debt
Duke Buys Back Credit-Crisis Debt
Jim R. Bounds/Bloomberg
A group listens during a tour of the Duke University campus in Durham, North Carolina.
A group listens during a tour of the Duke University campus in Durham, North Carolina. Photographer: Jim R. Bounds/Bloomberg
Duke University, which has the 15th largest U.S. college endowment, yesterday bought back $500 million it borrowed amid the financial crisis when it sought to bolster its cash position.
Duke paid a premium to investors to redeem the taxable bonds before their scheduled maturity in 2014 and 2019. The university, in Durham, North Carolina, used $90 million of the money raised in January 2009 to subsidize operations and invested the rest in corporate securities, earning enough to cover interest costs, said Tallman Trask, an executive vice president.
“I had two-and-a-half years of insurance,” Trask said in a telephone interview yesterday, referring to the availability of the bond proceeds. “I didn’t really need it and in the end I didn’t pay anything for it.”
Some of the wealthiest schools in the U.S. were forced to borrow money at the height of the credit crisis as their endowment returns plummeted and managers of their private-equity investments accelerated demands for cash the universities had committed. At least 15, including Harvard University and five other Ivy League colleges, sold a combined $7.2 billion of taxable bonds from December 2008 to November 2009, according to data compiled by Bloomberg.
Duke joins Harvard in beginning to buy back the debt, calling bonds before the final maturity dates, as their endowments rebound and they shift their investments into easier- to-sell assets, said John Nelson, managing director of higher- education ratings at Moody’s Investors Service in New York.
‘More Flush’
“All of the universities that borrowed money are in a better position, in a more liquid position,” said Nelson. “They are more flush with cash and short-term investments.”
Harvard, the wealthiest university, with an endowment valued at $27.6 billion as of June, notified investors last month that it will redeem $300 million of $1.5 billion of taxable bonds it sold in December 2008. The AAA rated securities were set to mature in January 2014 and pay an annual interest rate of 5 percent. They will be redeemed on June 2.
The redemption price to be paid by the school in Cambridge, Massachusetts, hasn’t been set. Harvard also sold $1 billion of tax-exempt debt at the height of the credit crisis.
Stanford University, near Palo Alto, California, in January said it will draw down half of the $800 million it placed in a so-called liquidity fund after borrowing $1 billion in April 2009. The money will be spent on capital projects and refinancing higher-cost debt, Randy Livingston, Stanford’s chief financial officer, said by e-mail yesterday.
Duke’s Cost
Duke paid almost 15 percent more than face value to redeem $250 million of its taxable bonds that were to mature in April 2019 and a 7.9 percent premium for $250 million that was to come due in April 2014, according to Bloomberg data. The school’s endowment gained 8.6 percent to $4.82 billion in the 12 months through June 2010, according to a report from the National Association of College and University Business Officers and the Commonfund Institute.
The premium paid to redeem the bonds is less than the cost of paying interest on the securities until they mature, Trask said.
“Duke is doing what a prudent issuer should do if they have the ability by calling their higher interest-bearing debt,” Matthew Buscone, a portfolio manager at Breckinridge Capital Advisors in Boston, said by e-mail. Breckinridge, which oversees $12 billion in assets, owned some of the redeemed bonds, he said.
To contact the reporters on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
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