U.S. universities sell debt as endowments falter

SAN FRANCISCO, April 27 Mon Apr 27, 2009 3:01pm EDT

SAN FRANCISCO, April 27 (Reuters) - Top U.S. universities, whose endowments have been hit hard by fallout from the global financial crisis, are selling bonds to raise money to shore up their financial positions.

Stanford University became the latest top university to sell taxable debt to make up for recent losses in its endowment, the third largest of any U.S. university.

Stanford on Thursday sold $1 billion worth of debt in a sale led by Goldman Sachs, JP Morgan, and Morgan Stanley.

"It's insurance for us in case the economy gets worse," said Lisa Lapin, a spokeswoman for the university.

The university sees the proceeds from its bond sale as a way to pad its cash position, its chief financial officer, Randy Livingston, said. Although Stanford has no immediate plans to use the cash -- it will hold the cash in a separate investment fund -- it was a good time to sell bonds.

"We issued the debt last week because the bond market was favorable. Although we don't have a pressing need for the cash now, we did not want to find ourselves in a future situation where we urgently need the cash but the bond market is closed," said Livingston.

Stanford expects its endowment, which provides about a quarter of the university's operating revenue, by the end of August will have declined at least 30 percent from $17.2 billion a year earlier, shortly before financial markets began to crater.

Stanford's projected loss would be in line with the average loss of about 25 percent in university endowments in 2008 and the first part of 2009, said Matthew Hamill, a senior vice president at the National Association of College and University Business Officers.

Overall, Stanford's debt has increased substantially over the past five years, doubling since 2005 to about $3 billion.

But the debt is still small compared to the university's endowment, and Fitch Ratings on Wednesday gave the new bonds its highest AAA rating, which takes into account Stanford's ability to repay debt.

Many of the universities now selling bonds said last year they would lower tuition based on then-strong investments. But market turmoil may complicate those plans.

Stanford in February raised undergraduate tuition and associated fees 3.5 percent to $48,843 but said it was committed to a new financial aid program that waives tuition for students from families earning less than $100,000 a year.

University finances are now under intense pressure, Hamill said, and bonds are a "completely understandable" response -- far better than selling off long-term investments that will likely be worth more in the future.

"The cost of borrowing, issuing this taxable debt, is seen as being lower than the cost of taking that loss and selling that investment that you really don't want to sell," he said.

Harvard University, whose endowment is the biggest of any U.S. university, sold $1.5 billion of taxable debt in December. Princeton University followed with a $1 billion debt sale in January. Duke University and Cornell University each subsequently sold $500 million of debt.

"The bond sale helps us avoid liquidating endowment holdings and strengthens our cash-flow position," said Princeton spokeswoman Cass Cliatt.

In their 2008 fiscal years, Harvard's endowment was worth approximately $37 billion, Stanford $17 billion, and Princeton $16 billion; recent losses have reduced values by about a third.

Duke's endowment was around $6 billion, and Cornell's endowment was around $5 billion, according to a study by the National Association of College and University Business Officers.

"Assumptions institutions made about how to invest their money short term, medium term, long term all of a sudden got turned on their head when the markets went down," said Hamill. (Editing by Leslie Adler)