Harvard Name Aids Debt Sales

The cachet of the Harvard brand name came into play on the bond market when the University sold $480 million of debt last week and beat benchmark interest rates—an indication that the University’s bonds remain in high demand despite Harvard’s budgetary troubles.

The longest-term bonds issued this week were priced to yield 4.02 percent over 24 years, or 0.3 percent lower than the benchmark for securities of similar quality. The below-market yield means that Harvard will pay investors less interest than average on its tax-exempt debt, but the exact savings to the University were not available this week.

Harvard’s latest bond sale brought the school’s outstanding debt to $6.5 billion dollars, a debt load comparable to that of the city of Chicago. Proceeds from the sale—which attracted a mix of investors including high net worth individuals, hedge funds, and insurance companies—will be used to fund a building project at the Law School and to refinance previously issued University debt.

Executives at Barclays—which headed a group of five investment banks that managed the bond sale—said in interviews with The Crimson last week that Harvard’s bonds were particularly appealing to investors given the University’s excellent credit rating and its strong reputation in the market. A high level of demand tends to drive down the yield on bonds.

The executives said they considered the below-market rates on Harvard’s latest debt issuance unusual but not surprising, in part due to the University’s strong brand name.

“Credit strength, scarcity value, and brand recognition combine for pretty good execution,” said Jim Merli, a managing director at Barclays.

Harvard rarely issues debt, has nearly universal name recognition, and is located in a state with “strong wealth demographics,” said Steve Milano, who is also a managing director at Barclays, noting that these factors contributed to the success of the sale.

Milano added that investors and companies facing high marginal tax rates found these bonds particularly appealing because they were tax-exempt.

Harvard’s money managers have said in the past that maintaining the University’s “AAA” credit rating is one of their top priorities. Though many colleges and universities, including Dartmouth, have seen their credit ratings downgraded due to fallout from the economic recession, outsiders remain confident in Harvard’s ability to repay its debt.

“At the moment Harvard’s credit rating is not in question in investors’ minds, as evidenced by this sale,” said one source close to the deal who asked not to be named discussing Harvard’s credit rating in order to preserve his relationship with the University.

Last year, in the midst of the financial crisis, Harvard sold $2.5 billion worth of bonds at a higher yield and received scrutiny for issuing debt during an unfavorable financial climate. A Forbes cover story suggested that Harvard was at a disadvantage in the bond market because it acted in a “cash-raising panic.”

But supporters of the University’s sale said at the time that, given the unfavorable financial climate, those bond prices were unavoidable and a product of the credit crunch—and not the result of the University’s actions or financial situation.

A portion of this week’s sale will fund the Law School’s Northwest Corner Building, a complex that will house a student center, the school’s growing clinics, and classrooms.

The building is scheduled for completion during the winter of 2011.

University administrators have halted or slowed other capital projects, most notably Harvard’s campus expansion across the Charles River. But construction on the Northwest Corner Building proved more expensive to halt than to continue, according to statements by former interim Law School Dean Howell E. Jackson last year.

—Staff writer Elias J. Groll can be reached at egroll@fas.harvard.edu.