Bloomberg News

Northwestern, Tufts Tap Taxable Debt for Flexible Spending Bonus

March 23, 2012

Tufts University and Northwestern University joined corporations in selling $25.7 billion of bonds this week as the schools were tempted to taxable debt by looser government oversight.

Tufts, the Medford, Massachusetts-based school chartered in 1852, sold $250 million of taxable 100-year bonds yesterday, the sixth such sale by a university in the past year, according to data compiled by Bloomberg. Northwestern in Evanston, Illinois, issued $200 million of 35-year notes on March 21, while George Washington University sold $300 million of 10-year debt.

Colleges, which mainly issue in the municipal market, sold corporate debt after the top-rated 30-year corporate debentures in November became the cheapest relative to municipal bonds in the past 10 years, according to index data from Barclays Plc. While corporate debt is pricier, universities can use it for working capital and to fund projects with less Internal Revenue Service restrictions.

“They can save a little money by borrowing tax-free, but they calculate that the benefit of not having to worry about IRS regulations in terms of what they spend the money on is enough of an advantage to overcome any interest-rate savings when rates are so close together,” Alan Schankel, a fixed-income director at Janney Montgomery Scott in Philadelphia, said in a telephone interview.

The gap between relative yields on top-rated 30-year corporate bonds and similar-maturity, high-grade municipal debt was 48 basis points as of March 21, compared with the average 98 basis points over the last 10 years, Barclays index data show.

Capital Projects

Tufts may use proceeds to support current or future capital projects from renovations to facility expansions and to refinance outstanding borrowings, according to offering documents. The university anticipates project expenditures of $430.3 million in the next five years with $250 million funded by debt.

“As these institutions become more complex, they really appreciate the flexibility the taxable market provides them,” said John Augustine, managing director of the higher education finance group at Barclays in New York. “The tax-exempt market is highly regulated in terms of how they use the proceeds.”

Total U.S. investment-grade sales fell to $22.2 billion this week from $27.4 billion in the five days ended March 16, Bloomberg data show. Speculative-grade bond issuance also declined, to $3.6 billion from $7.7 billion in the previous period.

Volkswagen Offering

Volkswagen AG, Europe’s biggest carmaker, led offerings by issuing $3.35 billion of debt on March 19, Bloomberg data show. American International Group Inc., the insurer rescued by the U.S. government in 2008, sold $2 billion of bonds and London- based miner Rio Tinto Plc raised $2.5 billion of debt.

Investors demanded the lowest premium in seven months relative to Treasuries to hold investment-grade bonds, according to Bank of America Merrill Lynch index data.

The extra yield investors demand to own high-grade corporate credit instead of Treasuries was unchanged at 191 basis points after reaching 189 on March 20, the narrowest since Aug. 5, the index data show. Spreads on high-yield securities widened 5 basis points to 591 basis points, after reaching 579 on March 19, the smallest gap since Aug. 1.

Government Bond Selloff

The securities are benefiting from tighter supply, with less issuance than in previous weeks, according to JPMorgan Chase & Co. A selloff in government bonds that sent yields on benchmark 10-year Treasury notes to 2.38 percent, the highest since October, on March 19 narrowed corporate bond spreads relative to government debt.

Investor confidence in riskier assets such as company debt rose as claims for jobless benefits dropped in the week ended March 10 to match a four-year low after job growth in February capped the best six months since 2006, and the Federal Reserve last week said 15 of the 19 biggest banks could maintain adequate capital levels in a recession scenario.

“Pension funds are shifting into a larger allocation to credit due to legal and structural issues and will likely accelerate this shift with higher yields,” JPMorgan analysts led by Arun Kumar wrote in a March 20 report. ‘Insurance companies have been hoping for higher yields to add more exposure rather than reduce it, among other trends.”

Corporate Yields

Absolute yields on all dollar-denominated corporate debt jumped to 4.408 percent on March 20, the highest since Feb. 3, before declining to 4.36 percent on March 22, Bank of America Merrill Lynch index data show.

Tufts, which didn’t previously have corporate bonds outstanding, sold $250 million of 5.017 percent, 100-year debt that priced to yield 165 basis points more than 30-year Treasuries in its offering yesterday, Bloomberg data show.

Life insurance companies are particularly interested in buying debt from universities, especially the longer-term securities, Barclays’ Augustine said.

Uses of proceeds, often slated for long-term physical assets, range from deferred maintenance or energy upgrades to constructing facilities like research labs and new academic buildings, he said.

Northwestern, which includes Orrington Lunt, a founder of the Chicago Board of Trade, among its forefathers, issued 4.198 percent notes maturing in December 2047, after originally planning to sell $150 million of debt, the data show. George Washington University, created in 1821 through an Act of the Congress, sold $300 million of 3.485 percent, 10-year notes at a 112 basis-point spread.

Sales by colleges and universities this year have “already accounted for half of the taxable volume of all of last year, so it looks like we might exceed last year’s volume,” Edith Behr, a senior credit officer at Moody’s Investors Service, said in a telephone interview.

Quarterly sales of college debt are set to reach or exceed $1.5 billion, compared with $3 billion issued in all of 2011, according to Moody’s.

To contact the reporter on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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