Capital Spending May Be Slashed

Harvard is considering reducing capital spending and projected new debt issuance by as much as 50 percent due to recent endowment losses, according to a credit rating report issued by Moody’s Investors Service on Wednesday.

The University has already slowed construction of its Allston expansion, which combined with other campus capital projects would have cost roughly $1 billion a year in capital spending and required Harvard to issue $3 billion in new debt over the next three to four years, according to the report.

Planned spending could revert to higher levels “if fundraising results or the economy’s growth is substantially better than expected,” said Moody’s, which expressed confidence in the University’s liquidity position and reaffirmed its top “Aaa” rating. Moody’s does not anticipate that Harvard’s long-term competitiveness will be affected by the capital reductions since peer institutions also taking hits.

Harvard spokesman John D. Longbrake declined to comment on the spending reductions further than what was stated in the report. But he noted that a letter to the community from University President Drew G. Faust dated Feb. 18 stated that the Harvard was conducting an “intensive, ongoing review” of capital projects in order to avoid “overextending the University’s near-term financial commitments,” while keeping in mind academic and community commitments.

Harvard’s endowment, totaling nearly $37 billion last June, lost at least an estimated 22 percent of its value in the four months ending Oct. 31, according University officials. Harvard planners have said they are anticipating a 30 percent decline for the full fiscal year, although some reports have speculated that losses could be even greater.

While Harvard has “robust credit strengths” and maintains a $2 billion line of credit from a consortium of banks, Moody’s said the University’s liquidity position has suffered recently due to endowment losses and stress in the debt and swap markets. In December and January, Harvard completed $2.5 billion in bond sales to guarantee cash flexibility and refinance risky variable rate debt.

According to the report, disruptions in the tax-exempt variable rate debt markets last fall “increased the perceived risk that Harvard could experience a failed remarketing of its debt.” While no such failure occurred, the disruptions hampered the University’s liquidity position by forcing it to keep cash on hand to meet possible calls on its variable rate and commercial debt obligations.

Harvard is reported to have also invested heavily in interest rate swaps, a type of derivative that allowed the University to control for possible increases in interest rates on its debt. But instead of rising, the report said rates fell “rapidly,” forcing Harvard to meet large collateral requirements.

The report added that since the decline came in the fair value of the portfolio, or the amount that Harvard would gain by terminating the swaps (or lose, in the case of a negative value), the liquidity drain could be reversed if rates rise again in the future. As of October, the University would have had to pay $571 million to terminate its interest rate swap portfolio, according to a December report from Standard & Poor’s rating services.

The report also cited concerns that the University would be forced to use its cash reserves to meet certain capital calls, such as those from private equity and venture capital clients, that have traditionally been funded using returns from the University’s other private holdings.

While the University had over $11 billion in staggered commitments to such firms through 2018 at the end of the last fiscal year, the report said that even under extreme circumstances, no more than half of this would be called in the next year, and that the University’s substantial but less liquid investments could also be used as a source of cash over the few years.

Regardless of these concerns, the report said that Harvard’s current liquidity position has significantly improved and should remain healthy, despite possible strains from “self-liquidity debt, swap collateral posting, endowment spending requirements, private investment capital calls, and the general operating needs of the University.”

According to the report, the University’s policies require it to be able to produce approximately $1.1 billion in cash on a weekly basis. As of Feb. 28, the University held over $5 billion in easily convertible assets, such as money market funds and Treasuries that exclude funds on-loan or pledged as collateral. Harvard also estimates that more than $9 billion of its general investment pool could be liquidated within a year, providing additional cash reserves.

—Staff writer Peter F. Zhu can be reached at pzhu@fas.harvard.edu.