Harvard May See Key Rates Rise

Though Harvard’s endowment has posted strong returns amid the global financial crisis, the University’s finances may still be affected by the frozen credit markets.

Harvard had issued more than $1.5 billion in variable-rate bonds as of the end of the 2007 fiscal year, according to the University’s annual financial report. These bonds have the potential to become costly for the University because of their volatility in the current turmoil.

Interest rates on variable-rate bonds have soared as investors demand higher rates of return on these securities in the face of widespread market instability.

A University spokesman declined to comment on how this spike in interest rates has affected Harvard’s balance sheet.

Bonds allow the University to collect money from investors in exchange for the promise to repay the principal amount plus interest later. The coupon rate of variable-rate bonds is tied to the market interest rate.

Princeton, which had issued $200 million worth of variable-rate bonds, has seen interest rates on some of its bonds quadruple in the past week, according to Bloomberg News. Princeton’s Controller Kenneth Molinaro told the News that the increase is costing the school about $8,000 per day.

With nearly eight times as many variable-rate bonds issued, Harvard could potentially be losing significantly more.

The rate increases at Princeton can be partially attributed to the bankruptcy of Lehman Brothers, the investment bank that underwrote the bonds issued by the New Jersey university.

Harvard refused to disclose the name of the firm that underwrote their outstanding public debt, but the University has had at least two fixed-rate bond issuances in 2008, both announced Jan. 23 at sums of $243 million and $145 million, underwritten by Morgan Stanley, according to data from Bloomberg Finance L.P.

At the end of 2007, Harvard held more than $914 million in fixed-rate bonds, according to the annual financial report.

In total, Harvard has more than $3.8 billion in bonds and notes payable.

Kenneth A. Froot, a professor of business administration at Harvard Business School, said that Harvard’s AAA credit rating, the highest attainable by a corporation, may insulate it from the trouble in the bond market.

“Having a AAA rating is important,” he said. “It’s clear that Harvard has access to lots of other sources of capital.”

The Daily Princetonian reported that Princeton is currently in negotiations to find a new bank to trade the bonds that had been handled by Lehman Brothers. Christopher McCrudden, the university’s vice president for finance and treasurer, told the newspaper that Princeton will prioritize a strong balance sheet over market performance when selecting a new firm.

—Staff writer Jamison A. Hill can be reached at jahill@fas.harvard.edu