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University to enter taxable bond market
STANFORD -- Stanford is about to sell $150 million in taxable bonds to finance infrastructure investments, including earthquake repairs and deferred maintenance projects.
This is the first time the university has used taxable bonds to meet the general needs of the university, according to Chief Financial Officer Peter Van Etten.
The university is entering the taxable bond market because when Congress established a $150 million cap on tax- exempt debt for universities in 1986, Stanford already was over that cap. The university presently has $350 million of long-term tax-exempt bonds outstanding.
Van Etten said he expected the taxable bonds to sell for around 7 percent; government securities of a similar maturity presently sell at around 6.5 percent.
Approximately $100 million of the bonds will cover debt for capital projects in 1994 and 1995, including earthquake repair, deferred maintenance, dormitory renovation and new construction. That represents the net increase in university debt; the university will use the remaining $50 million in the bond issue to convert some short-term debt financed through a commercial paper program previously used for capital projects.
The new issue will be in the form of 30-year maturity bonds with no amortization. This provides the most cost-effective interest rate in the taxable market, Van Etten said.
The bonds include a "make-whole" call, which will allow the university to call the taxable bonds whenever the university wishes to do so. This option might be executed if future changes in the law allow Stanford to issue more tax-exempt bonds. The university then would refinance the debt, paying investors a modest premium. The feature involves no up-front costs but gives Stanford added flexibility, Van Etten said.
An extensive analysis of the university's debt capacity and credit standing conducted for the Board of Trustees last May indicated that additional borrowing would not negatively affect the university's AAA rating.
Stanford's total outstanding debt - long- and short-term - after this new issue will be about $650 million.
More borrowing will be needed later for capital projects, Van Etten said. An extensive analysis of capital needs conducted last summer called for more than $500 million in capital investments in the next five years. Approximately half of that investment is expected to be provided by gifts and reserves, while the balance, primarily for earthquake repair, deferred maintenance and Housing and Dining Services projects, will be funded with debt.
The investment banking company Goldman Sachs is the lead firm managing the new taxable bond issue, with Bankers Trust serving as co-manager.
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