Betting on Bonds

With its decision this week to issue $245 million in long-term, tax-exempt bonds, Harvard took a significant sleep toward improving its long-range ability to finance big capital projects, according to financial officials interviewed this week.

The purpose of the bond issue--the largest ever managed under the auspices of the state's Health and Educational Facilities Authority (HEFA)--is "to stabilize the cost of money" for the Universities various department carrying on major construction or renovation projects, explained College Treasurer George Putnam '49.

Instead of assuming the cost of a batch of capital projects all at once, he said. Harvard is essentially spreading out payment of construction bills over the thirty years the bonds are outstanding. The yearly income for the various faculties from rises in from rate or contributions will then go to retire this debt, he added.

The money from the sale of the bonds is earmarked to help pay the debt for projects already started--like the $50-million House renovation--and for financing projects scheduled for the next several years--like the Fogg Art Museum. The total cost of all the construction is $195 million, while the remainder of the money will go for such purposes as setting up a "debt reserve" for future costs.

Debt financing is not a new concept for Harvard, not for other colleges increasingly facing financial squeezes, but the size of this week's issue is unusual. "That's higher than anything we've done," said Alexander B. Sharp, vice president for financial affairs at the University of Chicago.

Harvard officials, though, said the time was unusually ripe for attempting this sort of complicated financing procedure.

With interest rates so low, explained Vice-President for Administration Robert F. Scott. "The financial attractiveness of borrowing is superior to the financial penalty of using your won money" to pay for the projects.

That is, the interest the University is paying out to the bond buyers--slightly below the 7 percent averaged out for all issues is less than Harvard estimates the endowment will earn with the extra principal.

As Putnam said "We're lending at the tax exempt rate, but we can invest our own money at the taxable rate."

Harvard will be paying out interest of about seven percent, while it can then reinvest that money in Treasury bonds earning 12 percent, explained Sherwood Bain, senior vice-president of the Boston investment banking firm, Burgess and Leith.

The fact that income from the bonds is non taxable is what allows bond-buyers to ignore the relatively low payrolls from the Harvard issues Harvard's high rating as a borrower triple. A from the credit raters also helps assure buyers, as does the complicated nature of the debt-offerings--known as "put" bonds.

That means that after a certain period of time--which depends on the type of bond bought--a buyer is allowed to have the bond prematurely redeemed, at a price equal to the principal and interest thus accrued, and the University is allowed to change the rate of interest it pays out on the issue. "Both the seller and buyer are protected against change's in interest rate," explained Putnum, pointing out that with the uncertain nature of interest rates, investors are increasingly unwilling "to stick their necks out to buy bonds."

Putnam and Financial Vice-President, Thomas O'Brien, said they don't expect interest rates to drop much further than they have in recent months and that they believe Harvard is well-positioned to profit nicely from the sale if interest rates start back up again.

On the other hand, they admitted, if interest rates do decline. Harvard will have lost an opportunity to save even move money.

Other factors also played somewhat less of a factor in going ahead with the sale. For one thing, financial officers said, there has been some rumbling in recent years to curb the tax-exempts status of universities' bond-welling. The fear that "tax-exempt borrowing procedures would be withdrawn," sometime, was certainly weighed in the University's decision, O'Brien said But he added that Harvard "wanted to make sure that this [option] wasn't precluded to us."

In addition, O'Brien said, the University stands to gain some $2.5 million from HEFA's investment of funds earmarked for projects which have not yet begun.

The money from the bond sale will be enough to finance all the construction and renovation projects the University has planned for several years, except for the beleagured $250 million Medical Area Total Energy Plant (MATEP) Putnam said Harvard is currently trying to arrange a debt-sale to refinance that project. but he added that he is not sure HEFA--which arranges financing for state colleges, hospitals, and cultural centers--will approve that.