University Bond Sale Raises Less Than Expected

Harvard’s $601 million bond sale on Tuesday raised 20 percent less than had been planned earlier, as rising interest rates led to a decision to shrink the size of the deal.

The bonds were priced at a premium, with 10-year bonds yielding 2.54 percent—20 basis points lower than the benchmark for AAA-rated institutions on municipal debt due in 10 years, according to Bloomberg.

While overall interest rates remain low, rates on longer-dated tax-exempt municipal bonds such as those issued by Harvard rose about 10 to 13 basis points on Tuesday, due to inflationary concerns spurred by the Federal Reserve’s announcement to buy back $600 billion in Treasury bonds. The movement in rates increases the cost of borrowing for the University.

University spokesman John D. Longbrake said that Harvard viewed the bond offering as a success.

“Deals are commonly resized based on market conditions, especially when the issuer has flexibility in its financing strategies,” Longbrake said.


The bonds—which were issued through the Massachusetts Development Finance Agency—will refinance long-term debt and pay construction costs for the renovation of the Fogg Museum.

Morgan Stanley served as lead underwriter.

Last week, Harvard sold $300 million of taxable 30-year bonds.

In all, the recent bond issuances will bring Harvard’s total outstanding debt to $6.6 billion, more than double the amount on the University’s books in 2006.

Harvard’s last bond sale in December 2008 raised $2.5 billion at the height of the financial crisis, as the University faced various liquidity demands and sought to alleviate them by tapping the bond markets.

Harvard retained its AAA credit rating from both Moody’s Investor Service and Standard & Poor’s, reflecting the rating agencies’ continued faith in the University’s finances. A strong credit rating allows Harvard to raise capital more easily and cheaply from the debt markets.

Though Harvard’s endowment suffered a heavy blow during the financial crisis, investment returns reached 11 percent in fiscal year 2010.

As University finances have increasingly stabilized, Harvard is rethinking its financial strategy for the next few years.

For one, Harvard intends to decrease its capital spending for the next two years, according to both rating agencies.

And in 2009, University President Drew G. Faust announced that Harvard would cut as much as half of its capital budget and expressed plans to depart from Harvard’s usual method of financing new construction by borrowing.

Currently, the University has relied more heavily on private donations to finance building projects, including construction at the Law School, the renovation of the Fogg, and ongoing building projects in Allston.

In addition, Executive Vice President Katherine N. Lapp is implementing a new capital planning process that will involve centralizing decisions about the optimal use of financial resources.

—Staff writer Zoe A. Y. Weinberg can be reached at