Universities Join Century-Bond Boom After Rates Tumble Worldwide
Universities Join Century-Bond Boom After Rates Tumble Worldwide
(Bloomberg) -- American universities, used to taking the long view of history, seem to see the current era of rock-bottom interest rates as one that may not come around again for another century.
Rutgers University in New Jersey this week is planning to sell $330 million of bonds that don’t mature for 100-years, joining a small but growing number of schools that are seeking to lock in current borrowing costs by issuing unusually long-dated debt. It’s following the University of Virginia, the college founded by Thomas Jefferson that last week sold 100-year bonds for a yield of 3.23%.
“From an issuer’s perspective it makes a lot of sense,” said Joe Wenzel, a portfolio manager at Goldman Sachs Asset Management. “They are able to lock in these levels of rates for as long as possible.”
Negative interest rates in Europe and Japan has heightened investor demand for the higher-yielding century bonds, which are reserved for well-rated borrowers or governments that aren’t seen at risk of disappearing. Austria sold its second round of 100-year bonds this year and U.S. Treasury Secretary Steve Mnuchin has explored the possibility as an option for the federal government. Walt Disney Co. and Coca-Cola Co. have also sold them.
Well known universities have been stepping into the niche, with Rutgers’s set to be the fourth this year. Georgetown sold in January, followed by University of Pennsylvania in August. There was a similar spate between May and September of 2016, when rates also tumbled.
Jennifer Wagner Davis, the chief operating officer at the University of Virginia, said the school wasn’t necessarily planning on century bonds earlier in the summer when they started their recent debt sale. But when the yield curve inverted, “the market presented UVA with an unprecedented opportunity,” she said in an interview.
“It really was the market. We looked at our long-term investment and financial management. When we saw the yield curve invert to this rate we thought this would make great business sense,” Davis said.
Well-established colleges and universities that have been around for hundreds of years are natural issuers of these ultra long-dated bonds, said RJ Gallo, senior portfolio manager at Federated Investment Management Co. But he said it’s something that should be considered by states, which aren’t allowed to go bankrupt under U.S. law.
“States should look at it,” he said. “Yields now are approaching or are at record lows in the nominal space, it seems fairly compelling. Unless the U.S. becomes like these other countries in Europe, where negative-yielding long bonds become commonplace, I think those ultra long bond financings are attractive to borrowers.”
--With assistance from Sowjana Sivaloganathan.
To contact the reporter on this story: Danielle Moran in New York at dmoran21@bloomberg.net
To contact the editors responsible for this story: Elizabeth Campbell at ecampbell14@bloomberg.net, William Selway, Michael B. Marois
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