Cambridge puts itself on the market
Cambridge announced its £350 million issue of 40-year bonds on Wednesday.
by Grishma Shanbhag
Friday 12th October 2012, 12:45 BST
For the first time since its inception in 1209, Cambridge University has decided to tap the public bond market instead of the pockets of wealthy benefactors to fund its latest development plans.
On Wednesday the University announced its £350 million issue of 40-year bonds. Net proceeds will be applied towards research facilities, accommodation and other assets including a potential site in northwest Cambridge with 1,500 housing units and 100,000 square metres of research space. The University has had to turn away many potential investors after receiving a surplus of offers totalling over £1.5bn on Tuesday.
The 40-year term to maturity will enable the University to tap into the longer investment horizons afforded by insurance and pensions funds, who in particular have shown a growing interest to invest in national universities.
Moody’s assignment of the top Aaa (stable outlook) rating to the bonds last week has fuelled demand from investors seeking to invest in top-rated securities offering a premium over sovereign paper. The rating is said to be indicative of the university’s “outstanding market position, significant amount of liquid assets and strong governance structure”.
Cambridge’s strong cash flows and stable revenues from its printing and assessment businesses, fund research facilities and endowments have enabled it to fund capital projects without debt so far, and the central institution commands around £2.6bn in net assets. The University’s highly transparent governance structure and strong regulatory framework under the Higher Education Funding Council for England has also been commended.
The stable outlook reflects the importance of the institution to the national economy and limited reliance on government funding compared to its peers. In amusing contrast the UK itself is rated Aaa with a negative outlook, signalling Moody’s inclination to lower its rating.
Commenting on the interest garnered, Professor Sir Leszek Borysiewicz, Vice-Chancellor of the University of Cambridge, said: “we are delighted by the success of this issue, and by the strong support shown by investors in the University and its mission. The proceeds will enable us to continue to invest in teaching and research at the highest international levels.”
The issuance marks a shift from the University’s traditional reliance on philanthropy as a source of income. Launched in 2005 as “the most ambitious educational fundraising initiative in Europe”, the Cambridge 800th Anniversary Campaign raised an astounding £1.2 billion. However, the recent sharp fall in average yields on corporate debt caused by worldwide central bank activity has provided an opportune environment for the University to make its bond market debut.
Despite the rise in the tuition fees cap from £3,375 to £9,000, direct subsidies for facility upgrades have been reduced under the higher education reforms and banks are increasingly reluctant to engage in long term lending. Capital markets offer an alternative for institutions wishing to secure certainty over their long-term financing and reduce their reliance on taxpayers amid public sector budget cuts.
While access to debt capital markets is common for leading US universities such as Stanford and Columbia, the concept of using an institution’s reputation and research as collateral is a new one in Europe. De Montfort University was the first UK University to make a bond offer in ten years. Lancaster University previously issued £35m worth of bonds in 1995, whilst Imperial took the alternative route of “private placement” agreements with investors.
The recent success of De Montfort and now Cambridge will undoubtedly spark interest from other universities who have traditionally relied on bank borrowing to fund new buildings and equipment. However, it must be noted that in issuing corporate debt, universities must be prepared to face the attendant risks as demonstrated by their American counterparts. The downgrades of the University of Cincinnati and Rensselaer Polytechnic Institute following misjudged levels of borrowing a few years ago highlight the necessity to ensure that borrowing does not outpace revenue and resource growth.
The bonds were priced at 60 basis points over gilts and will be formally issued on October 17th. HSBC, Morgan Stanley and The Royal Bank of Scotland acted as joint bookrunners with Rothschild providing independent debt advice.