Bloomberg News

Williams $154 Million Biggest Sale Funds Buildings: Muni Credit

May 12, 2013

Williams $154 Million Biggest Sale Funds Buildings

Williams College, based in Williamstown, Massachusetts, is the nation’s top liberal-arts college, according to an annual ranking that U.S. News & World Report released in September. Photographer: Nancy Palmieri/Bloomberg

Williams College, ranked first among U.S. liberal-arts schools, plans the biggest borrowing in its 220-year history as education debt trails the $3.7 trillion municipal market by the most since 2010.

The private college, 135 miles (217 kilometers) northwest of Boston in the Berkshire Mountains, is set to sell $154 million tomorrow, its first issue since March 2011, said Fred Puddester, treasurer for the school. Proceeds will refund bonds for about $500,000 of annual savings and finance new academic and athletic facilities, Puddester said.

Bonds for education, which includes public-school construction debt, have earned 1.2 percent this year, lagging behind the 1.4 percent gain for the municipal market, Bank of America Merrill Lynch data show. While investors favor colleges’ stronger ratings, they’re drawn to weaker credits with higher yields, said Nancy Andes, senior underwriter of fixed-rate munis at Wells Fargo Securities LLC in Charlotte, North Carolina.

“There’s a natural reach for yield,” Andes said. “Typically with the higher-ed space, you get the high-quality rating category that investors are driven towards, but then you also have to realize that there’s a need for yield.”

Buyers’ Preference

Investors have been buying riskier securities to boost returns as interest rates have fallen to generational lows. At 3.67 percent, yields on 20-year general obligations are near a 47-year low of 3.27 percent set in December, Bond Buyer data show.

Williams, based in Williamstown, Massachusetts, is the nation’s top liberal-arts college, according to an annual ranking that U.S. News & World Report released in September. In terms of its credit, the school is rated one step below top securities by Moody’s Investors Service and Standard & Poor’s.

“People are taking on credit risk,” said Ron Schwartz, who helps manage $1.5 billion of munis at Ridgeworth Capital Management in Orlando, Florida. “And they want those extra basis points.”

The Williams issue, through the Massachusetts Development Finance Agency, follows sales this year by the University of California Regents, Harvard University and the University of Chicago.

Debt Load

Colleges have taken on $7.3 billion of muni debt this year, after $22.8 billion in 2012, the most since 2010, data compiled by Bloomberg show. Issuers that year were able to use the Build America Bonds program, part of President Barack Obama’s economic stimulus plan, which gave a federal subsidy on interest costs. The program expired Dec. 31, 2010.

This will be Williams’s largest borrowing, with $58 million paying for capital projects and the remainder refinancing debt, Puddester said. The deal will include bonds maturing in 20 to 30 years, he said.

“The rates are so low out there that we just thought it was advantageous for us to go as long as we can,” Puddester. “It really works out to level out our debt-service payments.”

Debt sold for colleges, universities and public schools and rated two steps below top-rated bonds is off to its worst annual start since 2010, Bank of America data show.

Diversification Appeal

Williams should still lure buyers because it doesn’t borrow often and the bonds can help diversify a state-specific mutual fund, Schwartz said. Investors like college and university borrowings because of their recognizable names, credit ratings and endowments, he said.

“They’ll do well because it will be a different name for a lot of different funds that need that state specialty,” Schwartz said.

The college’s last fixed-rate borrowing was in March 2011. Bonds maturing in July 2036 were priced to yield 4.77 percent, or 0.15 percentage point more than benchmark munis, data compiled by Bloomberg show.

Wellesley College, 12 miles west of Boston and carrying the same credit rating as Williams, sold tax-exempt revenue debt in March 2012. The bonds mature in July 2042 and were priced to yield 3.65 percent, 0.2 percentage point more than benchmark munis. Wellesley is ranked sixth on the U.S. News and World Report list.

Endowment Financing

Williams, which enrolled 2,015 full-time undergraduates in the 2012-2013 school year, will have about $331 million of debt after this sale, according to Moody’s. The school had total endowment funds of $1.72 billion as of June 30, 2012, down from $1.74 billion the year before, according to bond documents. Almost 50 percent of operating revenue comes from draws on the college’s endowment, according to Moody’s.

While the school relies on endowment gains for operations, such spending is about 5 percent of the fund’s value, Puddester said.

“That’s been a pretty steady number over the last decade, so we don’t anticipate that changing very much,” Puddester said.

About half of Williams students are on financial aid, which is supported by the school’s endowment and donors, Puddester said.

“The average debt of a Williams College student when they leave Williams College is about $9,000,” he said “We’re very generous with our financial aid.”

Annual Cost

Still, the cost of attending the school surpasses most American incomes. Tuition, fees, room and board totaled $56,770 for the 2012-2013 academic year, according to bond documents. The U.S. median household income in 2011 was $50,054, according to Census data.

While the school received 7,069 applications in 2012, down from 7,552 in 2008, Williams accepts about 17 percent of its candidates, according to bond documents. Of those accepted in 2012, 45.5 percent chose to attend. The median acceptance rate for comparable schools is about 34 percent, according to Moody’s.

“When bond buyers look at those type of statistics, they realize that we’re just a very strong credit,” Puddester said.

Elsewhere in the local-debt market this week, Dallas-Fort Worth International Airport is set to lead issuance as munis are at the most expensive levels since March relative to Treasuries.

At 1.79 percent, yields on benchmark 10-year munis compare with 1.9 percent for similar-maturity Treasuries. The ratio of the two interest rates, a gauge of relative value between the two asset classes, is about 94 percent, the lowest since March 11. The further the figure drops, the costlier local bonds are compared with federal securities.

Tax-free local bonds have yielded less than Treasuries in only six of the past 42 trading sessions, data compiled by Bloomberg show. The ratio has averaged 92 percent since 2001.

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus