A Billion Here, A Billion There: Harvard And Its (AAA Rated) Bonds

The endowment is huge: six billion dollars.

The tuition is high: approximately $25,000 a year.

Even the library fines are exorbitant: one cent a minute for all reserve material.

But Harvard University still feels the need to borrow money. Almost one billion dollars, in fact, in the form of municipal bonds the University issues to bring in cash for its ongoing construction efforts.

The University issues the bonds "when the need arises," says Robert H. Scott, who is vice president for finance.

The most recent bond issue was in the spring of 1992, and another issue can probably be expected in the next three to six months, according to Director of Financial Systems E. Lyndon Teft.

The motivation for an issue can include almost any large financial investment Harvard makes, but mostly construction commitments, Teft says.

Harvard's bond days date back to 1972, when the University made its first foray into the bond market to finance a new parking garage, among other auxiliary projects. Such early bond batches were limited in scale.

But in the booming eighties, Harvard jumped on the bond bandwagon and began using debt to finance mainstream education and research projects. Some of the Yard and House renovations were paid for by the bond issues of the last decade, Teft said.

Harvard currently has 14 outstanding bonds issues with their total sum valued at $959.6 billion, according to Harvard's fiscal 1991-1992 report, the most recent available.

As befits the oldest and arguably most prestigious institution of higher education in the country, the Harvard bonds are possibly "the best on the market," says James Weiss of Quick and Reilly, a Boston investment firm.

In fact, the Harvard bonds are so highly rated that in Massachusetts, only a few issuers--MIT and the town of Wellesley, for instance--can match them for security.

The University's bond rating also beats out all but one county in the state of Connecticut, according to a local bond trader.

The bonds are one of the few issues that have a AAA rating, the top available, from both Moody's and Standard and Poor, on their own, said another local bond trader.

Bonds are rated according to how secure the investment and the institution issuing them are judged to be, and Harvard's high rating is very rare for an institution without a bank's backing.

In fact, according to local traders, it's hard to keep the gold-plated Crimson bonds in the shop.

"Nothing can compare to them in terms of the quality of the paper," says Weiss. "They disappear really quickly. I get some and give customers notice, and they go."

"Sure, we pick them up for our AAA funds. They're as secure as you can get," says John Erickson of Nuveen, an investment company which buys bonds to resell through investment funds.

Issuing bonds is a good deal for Harvard because what its investors gain in security, they lose in yield, which is the money they get for holding Harvard's debt.

Recent legislation, however, has made the University's paper slightly less appealing to investors looking to own a piece of the John Harvard rock.

In the past, Harvard was able to issue double-tax free bonds, meaning no local or Massachusetts state taxes had to be paid on them, Teft says. Taxes are paid by the buyers, not the University, so no-tax bonds are a definite draw for the wily--or even not-so-wily--investor.

Because of changes in the tax code, however, Harvard is now allowed to issue only $150 million in tax-exempt bonds.

Since the University already has almost $750 million in tax free bonds outstanding--five times the new limit--any future issues will have to be taxable. To balance that tax, a higher yield will transfer more money University's pocket to the buyers,' Teft said.

If Harvard has any Capital Hill strings to pull, however, the new tax-exemption cap will likely be repealed.

"I would definitely like to see the tax cap removed," says Teft.

In order to underwrite its bonds, Harvard has used various investment bankers--mostly Banker's Trust and Goldman Sachs, although the University can use any other firm that offers it a better deal.

"They [the banks] come to Harvard with offers of how to refinance Harvard's debt and if the offer is good enough Harvard has a bond issue...kind of like a second mortgage on a house," an area trader said.

So who owns Harvard's debt, and how can the average Yard tourist buy a piece of the oldest institution of higher education in the nation (or at least its debt)?

Most of the Harvard's issues are publicly traded, which means they can be bought by anyone who wants to purchase them.

While all Boston-area brokerages contacted said they deal with Harvard bonds, not all had them on hand.

For example A.G. Edward's had none available for sale, but Prudential Securities had some double-tax free bonds available for purchase with nine years remaining until maturity and a 4.2 percent yield.

The specific people or corporations who own bonds is not public record, so the largest bond buyers must remain a mystery.

GM? Madonna? Yale University? It's possible. Weiss speculated that alumni who want a continuing connection to their alma mater are attracted to the bonds for posterity's sake.

But just in case Madonna is the power behind the debt, the average undergraduate has to wonder: how much power does the investor really have over the University?

John Harvard--or President Neil L. Rudenstine--might look good voguing. Then again, maybe not.