Yale University priced $1 billion of five-year taxable fixed-rate notes yesterday. The notes, which will mature in five years, will be used to take out $560 million of taxable commercial paper and provide working capital.
Barclays Capital, Goldman, Sachs & Co. and JPMorgan senior managed the deal.
The triple-A rated notes priced with a yield to maturity of 2.945%, which was 58 basis points above the five-year U.S. Treasury note at the time of pricing.
Wiggin & Dana LLP is Yale’s counsel on the deal.
The New Haven, Conn.-based Ivy League school plans to market $900 million of tax-exempt debt before the end of the fiscal year to finance capital projects and refund outstanding debt, according to a Standard & Poor’s rating report.
The notes are an unsecured general obligation of the university, which has 11,523 full-time equivalent students enrolled.
Moody’s Investors Service rates the notes Aaa with a stable outlook. In a rating report, it cited “superior financial resources,” extraordinary student demand, a 7.5% selectively rate, consistent cash flow from operations, and adequate internal liquidity.
As challenges, Moody’s cited a high reliance on investment gains and income to cover 43% of operating expenses and the need to balance investment strategies with liquidity and risk-management priorities.
Like other institutions of higher learning across the country, Yale’s endowment has lost value precipitously since the recession began.
Yale ended its fiscal year on June 30 with a $16.3 billion endowment that had decreased in value by $5.5 billion over the previous 12 months, according to the note deal’s preliminary official statement.
Part of that drop is from an increased reliance on the endowment to fund operating expenses.
The university used $1.16 billion of endowment assets for operating expenses in fiscal 2009, an increase from $850 million in fiscal 2008 and $684.5 million in fiscal 2007.
Moody’s analyst Roger Goodman said the credit has been strong enough to withstand the challenges.
“There is no higher rating within the triple-A category,” Goodman said. “You can become extraordinarily strong within that category so even if you have some weakening, you can still stay within that range ... the endowment remains very large despite the decline.”
Yale has a large derivatives portfolio with 32 separate swap agreements with a total notional amount of $975 million.
According to the POS, the swaps cost the university $22.7 million in fiscal 2009. Even so, Goodman said that the swaps’ fair value of negative $36 million should be seen in the context of close to a billion dollars of debt.
“That’s a pretty small number and it should over time provide a hedge to rising interest rates,” Goodman said.
Standard & Poor’s rates the notes AAA with stable outlook.
Yale is issuing the taxable notes on its own, but it has sold bonds through the Connecticut Health and Educational Facilities Authority in the past. The university has issued $1.54 billion of bonds through the authority since 2001, according to Thomson Reuters. Yale had $3.38 billion of debt outstanding as of June 30, according to the POS.