The University secured a three-year, $90 million loan from PNC Bank in September, increasing GW’s overall debt by more than 11 percent, according to a report presented on Friday to the Board of Trustees.
The loan, which University officials said was needed to ensure access to cash during turbulent economic times, brings the school’s overall debt to more than $850 million. The Board of Trustees also authorized $200 million in new borrowing at their meeting on Friday, which, if utilized, could bring the school’s debt to more than $1 billion in the future.
Associate Vice President for Budget Donald Boselovic said that the intent of the PNC loan was to ensure back-up funds for the University.
“With the conditions in the market being what they are, we wanted to make sure we had access to cash should we need it,” Boselovic said. “We’re just concerned about liquidity.”
The money from the initial $90 million loan was invested in U.S. Treasury bonds, along with the rest of the University’s cash reserves, according Boselovic and the Board report.
“People in general are having a hard time issuing debt. It’s an insurance policy,” Boselovic said.
The University’s short-term borrowing does not come without a price, however. Paying interest rates on the short-term loan from PNC is more expensive than the yield from the treasury bonds they have been invested in, Boselovic said. But he added that the immediate cost is worth ensuring access to funds should the University face a budget shortfall.
Economics professor Anthony Yezer agreed. While he said he was not familiar with the specific borrowing, he said that ensuring access to cash – both now and in September – is extremely important during uncertain times.
“If I thought I was going to need any debt in the next 24 months, I’d have secured it immediately,” Yezer said. “We’re entering into extremely uncertain times in terms of financing.”
Since the University’s bond rating – the equivalent to a credit rating for bonds – depends heavily upon the selectivity of its entering classes and how much it is able to earn off of tuition, tighter economic times and more financial aid may threaten that rating, which is currently excellent. A lower bond rating could reduce the University’s ability to secure relatively inexpensive debt, Yezer said.
Paying off the debt – including interest – already costs GW more than $51 million each year, roughly 9 percent of its annual operating budget.
In 2007, GW’s debt to net assets ratio, a common measure of how heavily the school has borrowed against its own resources, was already nearly twice as high as peer institutions like New York University, Boston University and Duke, according to the operating budget.
The $200 million bond authorization was not discussed during the open portion of the Board meeting and specifics of the plan have not yet been made public. Boselovic said he did not know how they plan to use the funds.
The new bond program would allow the school to take advantage of its particularly high credit rating and sell $200 million in bonds.
Previously, the University had maintained a $200 million line of credit with Bank of America. But that program, which provided relatively flexible borrowing, was terminated in November. The school hadn’t tapped into the line of credit since 2006.
