Hundred-Year Bond Sales Born at Yale Grow to Most Since 1996: Muni Credit
Ohio State University, with the largest U.S. single-campus student population, joined the University of Southern California and Massachusetts Institute of Technology selling the most 100-year school bonds in 15 years.
The institution, started in 1870, sold $500 million of taxable century bonds rated AA on Oct. 19 priced to yield 4.85 percent, 1.7 percentage points more than 30-year U.S. Treasuries, according to data compiled by Bloomberg. Investors ordered three times the amount of bonds on sale, said Geoffrey Chatas, chief financial officer of the Columbus-based school.
The Federal Reserve’s plan to push down interest rates by buying long-term Treasuries, and investors fleeing possible bond defaults in Europe, helped cut the 30-year U.S. debt yield to 2.7 percent on Oct. 4, the lowest since January 2009. That has forced buyers to look for higher yields elsewhere.
“You have the central bank trying to drive down long-term interest rates that are already unusually low,” said Philip Fischer, the former head of municipal market research at Merrill Lynch & Co. who now runs the adviser eBooleant Consulting Inc. in New York. “Buyers largely have to take what they’re given.”
About 60 century bonds have been sold since 1993, including at least five by private nonprofit or public universities, according to Chicago-based corporate adviser Development Specialists Inc. Yale University in New Haven, Connecticut, was the first school to experiment with the security, borrowing $125 million in 1996, the group said.
Top-rated MIT, based in Cambridge, Massachusetts, borrowed $750 million at 130 basis points more than Treasuries in May. Los Angeles-based USC, rated AA, two steps below the Standard & Poor’s top grade, sold $300 million of 100-year bonds in August at 174 basis points over Treasuries.
The average AAA rated tax-exempt bond maturing in 30 years yielded 3.66 percent yesterday, according to data compiled by Bloomberg. Tax-exempt AA rated education bonds yielded 4.56 percent.
Non-school sellers of century bonds include Norfolk Southern Corp. (NSC), a railroad rated BBB+ that borrowed $400 million in May. Mexico, rated BBB, sold $1 billion of the securities last October and another $1 billion in August.
Taxable bonds like those sold by Ohio State, MIT and USC are often an alternative because of restrictions sometimes placed on the private use of facilities built with tax-exempt financing, said Allen Marcum, director of budget, finance and treasury at MIT. The U.S. Internal Revenue Service can revoke the tax-exempt status of securities if borrowers run afoul of the rules.
“Whenever you are tracking private use in all of these facilities, it turns into a nightmare,” Marcum said this week at a nonprofit finance conference in New York.
Insurance companies bought $352 million of the MIT debt while mutual funds and other asset managers bought most of the rest, Marcum said in a presentation.
Anthony Crescenzi, a strategist and portfolio manager at Pacific Investment Management Co. in Newport Beach, California, which invests $1.3 trillion, said 100-year bonds help insurance companies match long-term liabilities with assets.
“For issuers,” he said, “a 100-year bond can make a strong statement about its ability to remain a going concern.”
Ohio State, with 56,000 students on its Columbus campus, decided to sell a 100-year bond about six weeks ago after the USC and MIT offerings, said Chatas, the finance director. The school is in the midst of a five-year $2 billion capital expansion and expects to borrow $1.6 billion for a medical center, research facilities and student housing, he said.
“When the century bond market heated up, we decided we ought to take a look at it,” said Chatas, who joined Ohio State last year from an asset-management division at JPMorgan Chase & Co. “We believe we’re going to be here long term.”
Following are descriptions of pending sales of U.S. municipal debt:
CHICAGO TRANSIT AUTHORITY, the nation’s second-largest public-transport system, plans to sell $559.7 million of debt, including $455 million of sales-tax revenue bonds for rail cars and capital improvements, as soon as next week, according to a preliminary official statement. Wells Fargo Securities will lead a syndicate of banks. The bonds are rated Aa3 by Moody’s, its fifth-highest grade. (Added Oct. 21)
DALLAS AND FORT WORTH will sell $106 million of taxable revenue refunding bonds as soon as next week, according to a preliminary official statement. The sale will repay debt for Dallas/Fort Worth International Airport, the world’s eighth- largest. Citigroup Inc. will lead the sale. The bonds are rated A+ by S&P, fifth-highest. (Added Oct. 21)
MASSACHUSETTS SCHOOL BUILDING AUTHORITY, with $648 million of general revenue last fiscal year, will sell $600 million of senior sales-tax bonds as soon as next week, according to a preliminary official statement. The bonds will fund local school construction and repairs. Barclay’s Capital will lead banks. (Added Oct. 20)
ILLINOIS, which approved the biggest tax increase in state history to close a deficit this year, plans to sell $300 million of Build Illinois sales-tax revenue bonds by competitive bid as early as next week, according to a preliminary official statement. The debt will fund infrastructure, educational and vocational projects and provide incentives for businesses to hire workers in the state. The bonds carry S&P’s top AAA grade. (Added Oct. 19)
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