The University’s debt grew by more than a quarter last week after administrators sold $300 million in bonds to outside investors – the single largest assumption of debt in its history.
When the University issues bonds, it accepts cash from investors in return for the promise to pay back the money plus interest – creating debt in exchange for cash. The transaction, which increased cash on hand by the same amount, means the University’s total debt stands at $1.4 billion – more than two and a half times where it stood a decade ago.
Taking on more long-term debt provides GW with cash to pay for projects and expenses, while also creating a cushion between volatile global financial markets and the University’s operations, Executive Vice President and Treasurer Lou Katz said. The University’s cash reserves stand at about $620 million.
Katz said favorable market conditions – particularly low interest rates – sparked the decision to incur additional debt. The new leverage will not finance a specific project, he said.
“We have $300 million more debt today than we had yesterday, but we have $300 million more cash,” Katz said.
He declined to give a numerical value to what level of debt would be too much, but said “we are comfortable with this level of debt – we can manage the overall capital of the debt and are well within compliance with our financial covenants.”
The University had $533 million in debt 12 years ago, a figure that broke $1 billion in 2010 but credit rating agencies maintained GW’s same strong grade over the past five years.
The move follows Katz’s long-term approach to boost liquidity – funds on hand to finance operational costs like construction, research, faculty salaries and financial aid. This strategy was the reason the University was able to weather the recession better than did peer organizations, maintaining student aid and hiring. Boston University and the University of Miami froze non-essential staff hiring in response to the economic downturn – a move GW wasn’t forced to make.
“It’s still a fragile marketplace,” Katz said, citing rising gas prices and instability in European markets as potential financial hardships that could require the University to have cash on hand. “You never want to borrow when you need to borrow money.”
The massive transaction marks the largest single assumption of debt in the University’s history, following an average debt increase of about $51.5 million over each of the past 11 years. In 2009, GW sold $200 million in bonds to increase cash on hand during the uncertain economy.
Moody’s Investor Service, an independent firm hired to research and evaluate the financial health of thousands of organizations, maintained the University’s A1 ranking after the bonds were sold last week. The category is the company’s fifth-highest standard of grades, dubbed investment-worthy.
David Jacobson, a Moody’s spokesman, said the ranking qualifies as “upper-medium grade credit” and noted that the firm assigned GW a “stable outlook,” which suggests no changes will be made to the ranking in the next 12 to 24 months.
“The higher you are rated, the less likely you are to default,” Jacobson said.
The highest rank is AAA, followed by AA, A and BBB investment grades. “Speculative” ratings of BB1 through C – more uncertain investments – exist as well. Outside investors use the rankings to judge the security of buying the University’s debt.
Moody’s ranked Boston University, which had a similar amount of debt last December, A2 – a peg down from the University. It assigned New York University’s significantly larger debt one grade higher – AA3 – than GW’s this month, citing “positive operating performance and highly marketable real estate holdings in Manhattan.”
The new debt was sold to about 50 large corporations and processed as taxable, not tax-exempt, as non-profit organizations are eligible to do. The bonds are 10-year agreements, which means the University must pay investors back within a decade. While the University must pay out the sticker amount of the bonds – $300 million – in addition to interest, it invests the cash in the mean time, generating interest to offset some of the costs of issuing the bonds.
These taxable bonds are attractive to large investors “which like to buy longer-term bonds to match their assets to their liabilities,” according to a Wall Street Journal report last week.
Katz said the University has opted to process the bulk of debt as taxable for more than a decade for many reasons, a trend other private colleges have begun to follow in recent years. Taxable bonds can be processed faster and cost less to issue, while carrying a slightly higher interest rate.
He called the interest payments “a small insurance premium” that would protect the institution from unanticipated dips in global markets.
“I’ve just been a big believer in this for a long period of time, because it’s a very efficient market. Although the interest rate may be a little bit higher, the spreads have narrowed dramatically,” Katz said. “On the tax-exempt basis, you’re restricted in how you can use the money. It’s got to be for specific projects. It can’t just be for the balance sheet of the institution.”
Tax-exempt funds must be designated for a specific project under Internal Revenue Service rules. The law also means facilities, programs and research funded with tax-exempt money have strings attached, Katz said, adding “this way, there are no restrictions except the ones we self-impose.”
The benefits of selling taxable – instead of tax-exempt – bonds far outweigh the slightly higher interest rate, Katz said.
No plans exist to incur additional debt, he said, although some of the debt could be bought back if the University deems current levels of liquidity unnecessary.
