$1.5 Billion in Debt Sold To Raise Cash

In response to drastic losses in its endowment, Harvard sells off debt

Harvard sold $1.5 billion in debt last Friday and plans to offer at least $600 million more in an effort to raise available cash following its endowment’s largest decline in recent history, the Wall Street Journal reported this weekend.

Proceeds from the sale will allow Harvard to push back payments for outstanding debt and provide more cash to meet the demands of University budgets without selling the endowment’s other holdings at depressed prices.

Last week, Harvard announced its endowment had fallen 22 percent—$8 billion—in four months from its June 30 value of $36.9 billion, a decline that comes amid the worst financial downturn in decades.

In the same period, the Standard & Poor’s 500 index fell 24.6 percent. The index has fallen an additional 9.6 percent since then.

The 22 percent estimate may not fully capture the actual losses from the four-month period, Harvard’s Executive Vice President Edward C. Forst ’82 said in an interview last week, noting that some of Harvard’s money is invested with external managers that have yet to report their latest figures.

The University’s debt receives the highest ratings available from leading rating agencies Moody’s and Standard & Poor’s—a fact that allows it to borrow at a lower rate. A prospectus for one of the bond sales obtained by The Crimson said Harvard expected the new debt to receive the same high ratings.

But even with top-flight credit, Harvard faces a higher cost of borrowing because of the recent market downturn.

According to the Journal, the University’s new 30-year debt will command interest payments of 3.375 percent above U.S. government treasuries—a widely used benchmark for risk-free investments. That figure is approximately twice the premium Harvard paid on 30-year debt sold two years ago.

In last week’s announcement, Harvard officials said they planned “to take advantage of Harvard’s strong credit ratings to increase the University’s flexible cash resources in the near term.”

Harvard Vice President for Finance Dan Shore declined to comment this weekend on reports of the new debt sales.

Harvard invests over a fifth of its endowment in assets that are difficult to convert into cash, such as private equity and real estate, according to Harvard’s September annual report.

These investments, which for years produced stellar returns for Harvard and other elite universities with similar portfolios, have posed problems in the current financial climate, which University of Chicago finance Professor Steven N. Kaplan said has led to a “capital squeeze” for endowments like Harvard’s.

Multiple media outlets recently reported that Harvard was also seeking to shore up endowment holdings by selling $1.5 billion of its private equity portfolio at a drastically reduced price, but Forst declined to address those reports.

—Staff writer Wyatt P. Gleichauf can be reached at wgleich@fas.harvard.edu.
—Staff writer Clifford M. Marks can be reached at cmarks@fas.harvard.edu.