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Stanford using commercial paper to refinance debt

STANFORD -- Stanford officials have launched a program to refinance some of the university's debt that they estimate could save the university about $2 million a year.

On Monday, April 20, the university's asset managers for the first time offered taxable "commercial paper" - short-term debt obligation - issuing $50 million in short-term notes to institutional investors.

Over the next few months, senior portfolio manager David H. Russ and his colleagues at the Stanford Management Co. will refinance about $130 million of outstanding internal loans and advances and a bank line of credit. Trustees in December authorized the program, with a ceiling of $200 million.

In addition to refinancing certain internal advances and external borrowing, the notes will be used to finance future facilities and capital equipment expenditures.

Stanford's commercial paper dealers, JP Morgan and BT Securities Corp., negotiated first-day commercial paper rates of approximately 3.90 percent for several maturity dates, Russ said. Specific pricing information is not made public because commercial paper is not traded on a public market. The Stanford rate is "very aggressive," Russ said, considering that three-month T-bills in bond-equivalent terms sold the same day at 3.75 percent.

Many campus clients - such as the Stanford Housing Assistance Center and Stanford West - have been borrowing at the prime rate, currently about 6.5 percent. The successful initial issue of commercial paper will lower that rate for them.

Buyers "lined up" to purchase Stanford's commercial paper, Russ said. The university received the highest possible ratings from financial rating services - P-1 from Moody's and A-1+ from Standard & Poor's - reflecting the strength of Stanford's financial position, and indicating high safety for investors while lowering the interest rate the university must pay. Stanford's long-term bond ratings are Aaa from Moody's and AAA from Standard & Poor's.

Commercial paper can be issued based on the credit of the issuer, as is Stanford's, or with backing from a third party, such as a bank. Commercial paper started in the 19th century, when industrial companies used it to raise funds during periods when local banks could not meet the demand for loans. It re-emerged as a financing source in the mid-1960s.

Stanford officials studied the commercial paper market for about 18 months. Harvard, University of Chicago and Northwestern also entered the market in recent months.

The Stanford Management Co. was established in 1991 to manage the university's financial and real estate investments. The company also manages the university's debt portfolio. Directly or through external managers, the management company manages approximately $4.5 billion of endowment trust assets, working capital and expendable funds and the assets of the pension benefit plan.



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