4-25-09: Stanford: $1 Billion debt issued

The University announced yesterday that it is issuing $1 billion in taxable debt, the largest amount in its history, in an attempt to shore up liquidity and working capital after a significant decrease in the value of the endowment in the past fiscal year.

On Aug. 31, 2008, Stanford’s endowment stood at $17.2 billion. However, according to Stanford’s Vice President for Business Affairs and Chief Financial Officer, Randy Livingston, the endowment value will be down at least 30 percent by Aug. 31, 2009.

Livingston said that the debt issuance is mainly a form of insurance that will protect the University with an additional layer of liquidity.

“Currently, we have ample liquidity to meet our current needs from both the investment and operations standpoint, but issuance of debt gives us additional liquidity and working capital in the event that the economy surprises us and the market turns downward again,” he said.

According to a Moody’s Investors Services report published yesterday, “The University will use the proceeds to supplement liquidity for working capital and generate corporate purposes, as well as to refinance approximately $200 million of taxable commercial paper.”

Livingston told The Daily that $350 million of five-year bonds were issued at 3.65 percent, $250 million of seven-year bonds at 4.30 percent and $400 million of 10-year bonds at 4.79 percent. On average, this means that Stanford is issuing debt at less than two percent over Treasuries, the benchmark for risk-free investments.

Last December, Harvard sold nearly $2 billion in debt. Princeton sold $1 billion last January.

Livingston said that a $1 billion debt issuance made sense because $800 million is approximately equal to one year of payout from the endowment to support University operations.

The University started considering a debt issuance about three to four months ago and discussed the possibility at both the February and April Board of Trustees meetings. Formal approval was obtained from the Trustees at the latter meeting.

“This debt offering is out of the ordinary because of its size,” Livingston said. “In the past, we borrowed money for facilities and equipment. This is unusual because we’re borrowing for liquidity purposes.”

Goldman Sachs, JP Morgan and Morgan Stanley were joint underwriters in this bond issuance.

According to a Goldman document, the debt is expected to be rated triple-A, and tranche sizes will each be at least $250 million.

All three of the nation’s major credit-rating agencies—Moody’s Investors, Fitch Ratings and Standard & Poor’s—do currently give Stanford debt a triple-A credit rating, which is the highest possible rating.

“Every time we do a major debt issuance, the three credit-rating agencies re-evaluate our credit,” Livingston said. “We think the rate we received was quite good.”

The University currently plans to reduce endowment funding for University operations by 25 percent over the next two years and reduce expenditures.

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