Harvard Considers Swapping in Tighter Credit Line

Harvard is considering replacing a $2 billion revolving line of credit with a smaller line of credit that charges a higher interest rate—a move that may constrain the University's cash flexibility during severe economic downturns.

According to Bloomberg, Harvard is negotiating terms on a $1.75 billion line of credit and is willing to pay back any loans at 1.25 percentage points above the London Interbank Offered Rate, a common reference point for setting floating interest rates. The University's current $2 billion line of credit, set to expire next month, allows it to borrow $250 million more at an interest rate 0.25 percentage points higher than LIB.

The move comes after months of scrutiny and criticism over the University's decision to sell billions of dollars in bonds at high interest rates late last year, as the financial crisis deepened, in order to boost liquidity.

Bloomberg also reported that Harvard may pay an upfront fee to the creditors funding the loan on top of the interest, as well as 0.1 percent interest on any untapped loans.

University spokesman John D. Longbrake declined to discuss the specific terms of the negotiations, but confirmed that the University will renew its revolving line of credit—which allows Harvard to draw additional funds after previous loans are repaid—for the next year.

Citigroup and Bank of America will set up the line of credit for the next year, Bloomberg said. In a report published last April, credit ratings agency Moody's Investors Service said the previous line of credit was funded by a consortium of banks, but it is unclear whether Citigroup and Bank of America participated. Spokesmen from Bank of America and Citigroup declined to comment.

The Moody's report noted that the $2 billion line of credit served as a source of "additional liquidity flexibility," though it does not qualify as "same-day liquidity"—a measure of an institution's ability to meet cash demands quickly. At the time, the ratings agency issued a stable outlook for Harvard's credit rating based in part on its "maintenance of strong liquidity and capital ratios."

During December and January, Harvard completed a $2.5 billion bond offering to bolster its cash reserves, as well as to refinance riskier forms of debt. Several media outlets have suggested that the University held insufficient cash reserves, and Forbes magazine wrote that Harvard had found itself in a "cash-raising panic" in the midst of the economic recession.

Earlier this year, the University's Chief Financial Officer Daniel S. Shore rejected this depiction of Harvard's finances, saying that the bond offering had been issued "quite competitively given market conditions at the time."

The recession and the projected 30 percent decline in endowment value have forced Harvard to enact sweeping budget cuts, from laying off workers to slowing down ambitious capital projects in Allston.

—Staff writer Athena Y. Jiang can be reached at ajiang@fas.harvard.edu.