Cambridge University follows Ivy League trend with £400m bond issue

Published 05th Jan 2010

For 800 years the University of Cambridge has stood solid as a rock, independent and, as universities go, strikingly rich. Not once has it ever resorted to significant borrowing to make ends meet.

Now, however, it is planning to raise up to £400 million from its first bond issue, following a trend set by Ivy League institutions in the United States to turn to the money markets for funding.

Andrew Reid, the university’s finance director, admitted that he was worried by the step into the relative unknown but insisted that it was the best way to secure the huge sums of money required for two one-off building projects.

“We usually raise money through benefactors but this time we need a significant sum so are turning to other methods,” he told The Times. “At the moment we are completely unleveraged. It worries me. But we are a very stable organisation and we need to manage our finances properly.”

The university’s recourse to the bond market suggests not so much penury — its investment assets as a whole are, after all, currently valued at about £4 billion. Rather, it appears to signal a new openness to the modern financial world from an institution that has traditionally relied on government subsidy and research grants for about half of its annual £1.14 billion operating income.

A bond is a certificate of debt issued by an institution — usually a government or a corporation — guaranteeing the lender repayment of the original sum borrowed, plus interest, by a specified future date.

Several American universities have issued new bonds in the past 12 months after market losses in their portfolios severely dented the value of their investments.

Among the most active issuers were Harvard, which sold $2.5 billion (£1.5 billion), Princeton, which sold $1 billion, and the University of California, which sold $1.6 billion in construction bonds, according to analysts at Roubini Global Economics and quoted by The Wall Street Journal.

It is not the first time that Cambridge has borrowed financial ideas from the Ivy League. Before the present crisis both Cambridge and the University of Oxford initiated US-style fundraising campaigns and hired in-house investment committees to reduce their dependence on state funding and build up endowment funds.

Their timing could not have been worse, however, and both universities saw the size of their endowments diminish after markets fell after last year’s credit crisis.

Lancaster University was the first in the UK to go for a bond in 1995 with a £35 million issue. The university claims that it has been a huge success and last year announced an £80 million refinancing of the debt.

Mr Reid said that Cambridge needed the money to finance two main projects: a development in northwest Cambridge and the redevelopment of two existing city centre sites — the New Museum site on Downing Street and the Old Press site near Silver Street.

The university investigated several options for raising money for the projects. “We remain open to bank financing, private placement or public bonds but the value of funding we anticipate needing, and the term [we are looking at, of 30 to 40 years] suggests that a bond issue is likely to be the best way forward,” Mr Reid said.

He added that the bond issue would be likely to be a “one off” action, rather than a regular fund-raising technique. “Projects like these only come along once every 15 years or so,” he said.

The university has been in talks with a number of banks about the issue for the past two to three years and is likely to proceed with the bond 6 to 12 months from now. It is expecting to earn a AAA credit rating.

Although the bond will be the first significant borrowing by the university’s central body, some of its 31 colleges have proved active in chasing investment opportunities during the financial crisis.

In October Trinity College spent £24 million to acquire the Meridian Delta Dome, the holding company of the 999-year lease on the O2 arena.

Last year Clare College, Cambridge, took advantage of low interest rates to borrow £15 million on a 40-year inflation-linked loan. It invested that money in rock-bottom stocks and shares, which it expects to deliver a £36 million profit in 2048 when it cashes in to repay the loan.

The University of Oxford said that it had no plans to issue any bonds, as did Eric Thomas, the Vice-Chancellor of the University of Bristol. “When we wanted to raise £250 million two or so years ago we just went to Barclays bank and borrowed it,” he said.

A spokesman for the Higher Education Funding Council for England said that using bonds to raise money was the exception rather than the rule for British universities: “It does happen from time to time, but the [market] conditions have to be right,” he said.

Source: ' Times '

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