Aussie Schools Follow Yale in Raising Cheaper Funds With BondsBenjamin Purvis
Australia’s two oldest universities are joining their American peers in borrowing from capital markets to help finance research and upgrade campuses.
University of Melbourne, in its debut bond sale, raised A$250 million ($235 million) via seven-year notes yesterday amid the biggest redevelopment works in its 161-year history. University of Sydney, founded in 1850, sold A$200 million of similar maturity 4.75 percent securities in April.
The offerings were the first domestic note deals since 2010 by Australian universities, which haven’t traditionally sought funding in capital markets in the same manner as their U.S. peers. Yale University, Massachusetts Institute of Technology and Georgetown University are among American schools that have issued U.S. dollar-denominated bonds this year.
“The big Australian universities have identified a need to diversify their funding sources,” said Ed Waters, an executive director for debt capital markets at Australia & New Zealand Banking Group Ltd., which helped manage both sales. “The Aussie bond market also offers cheaper funding for the big universities, like Melbourne and Sydney, than they can get through banks.”
University of Melbourne sold its debentures at 80 basis points more than the swap rate, according to an e-mailed statement from sale managers ANZ and National Australia Bank Ltd. The offering had initially been marketed at a spread of about 85 basis points with a minimum size of A$100 million.
Macquarie University and University of Wollongong, both based in the state of New South Wales, were the last local schools to sell domestic notes.
University of Sydney sold its inaugural bonds at an 88 basis-point spread over the swap rate in a transaction also managed by ANZ and NAB. The April 2021 notes’ yield premium over the semi-quarterly asset swap was 79 basis points yesterday, ANZ prices show. The institution is rated Aa1 by Moody’s Investors Service, the second-highest grade and equivalent to the score Standard & Poor’s gave to the debt program of its Melbourne peer.
“Investor demand for these Australian university deals is strong,” Gavin Goodhand, who helps oversee about A$550 million as a money manager at Altius Asset Management Pty, said by phone yesterday. “We’ve had two come to market and they’ve been well received, so there may be an opportunity for some of the other big universities to look at issuing as well.”
Research & Education
The yield spread achieved by the University of Melbourne compares with a gap of 85 basis points cinched by NAB last month when it sold paper maturing in five years. The largest Australian banks are rated Aa2 at Moody’s, one step lower than Sydney Uni, and AA- at S&P, another level down.
Melbourne University, which has more than 38,000 students, is undertaking the biggest infrastructure upgrade and development program since it was founded in 1853, according to the school’s website. Its issuance program will help refinance debt and boost capital expenditure, S&P said in a June 10 statement.
Sydney Uni, with more than 50,000 students and 3,000 academic staff, established a A$600 million issuance program, Moody’s said in an April 9 statement. That program will further investment in research and education facilities, and partly refinance a A$500 million bank loan maturing in 2016, the ratings company said.
Colleges in the U.S. routinely use bond sale proceeds for campus upgrades. Princeton University, part of the elite Ivy League, raised $200 million in January to help build and restore a library, an arts center and dormitories. In March, Pace University in New York state offered bonds to help finance accommodation and other facilities.
Yale University, also in the Ivy League, sold $250 million of five-year notes in April at a yield 30 basis points above Treasuries. The spread on the New Haven, Connecticut-based school’s 2019 debentures has since narrowed to 14 basis points, according to Trace prices. MIT also issued in April, selling $550 million of 2114 securities, while Georgetown priced about $101 million of 30-year bonds that month.
Sydney and Melbourne’s offerings come as demand for Australian dollar-denominated bonds from issuers other than banks and governments has squeezed credit spreads to the least in six years. Record-low central bank interest rates are also helping to cap borrowing costs.
The average spread over the swap rate for Australian industrial bonds was 107 basis points yesterday, the lowest since March 2008, a Bank of America Merrill Lynch index shows. The Reserve Bank of Australia’s cash target is at 2.5 percent and expected to remain there “for some time yet,” according to minutes of the bank’s most recent meeting published June 17.
“It’s good for the market that we’re seeing increased diversity,” Goodhand said. “Investors would probably jump at the chance to buy if another university came to market.”