YUFA
News
York issues bonds to raise money
by Robert MacDermid (Political Science, Arts)
In late February, York announced that it had successfully raised $200 million through the private sale of bonds. A short paragraph on the university's website indicated that the money raised will be used to "finance a portion of its current program of capital construction, including the Schulich School of Business, the Technology-Enhanced Learning Building, the Executive Learning Centre, Parking Structures II and III, and the new Atkinson Residence." The University is in the midst of a $340 million expansion with money coming from the bond sale plus $91 million from Superbuild - the Ontario Government infrastructure fund - $30 million from donations and $18 million from special grants to computer science programmes. Cuts to higher education funding in the 1990s have meant that the growth in student numbers has exceeded the space available in classrooms, residences and related facilities. Much of this needed construction and maintenance will now have to be funded by capital in private hands rather than through public funds raised by taxation.
York's 40-year bonds, paying 6.48% interest to holders, were sold privately to large financial institutions. At this point, it is not clear whether the identities of the bond holders will be made public. The bonds are not secured against York assets, but, as the Standard and Poor's presale report indicates, the likelihood of the University becoming insolvent is very low given its stable government funding, expected enrolment growth and valuable real estate for potential residential development.
The cost of carrying the debt will be about $13 million per year. The S & P report indicates that the University intends to pay off the bond holders with an internal sinking fund that will, in 40 years, build to the full $200 million. Neither the principal nor the interest costs of the bond issue may be repaid out of the University's block grant, so there will be pressure to increase fees for other services and to exploit commercial opportunities where they can be found. Residences and other commercial space will be easier to finance than will extra lecture halls and offices for teaching staff.
The York bonds cannot be publicly traded although they can be resold or transferred to other holders. This means that there is no ongoing market where the University's bonds fluctuate in price. The bonds were sold by two bond sales companies selected through a competitive bid process.
This unusual means of raising capital for Canadian universities is projected to be less costly than a conventional mortgage when interest rates, commissions and all other fees are included. York's building boom of the late eighties and early nineties was mostly financed through mortgages with banks. Before the sale of the bonds, the University's long-term debt stood at $89 million at the end of 2000-2001.
Three other Canadian universities have launched private bonds to raise capital. The University of British Columbia recently raised $125 million, University of Toronto raised $160 million of a planned total of $300 million and Brock University is planning to raise an undisclosed sum. The U of T money is going towards student residences and the UBC funds are to be used for similar housing and commercial projects. UBC, according to S & P's rating report, expects to raise $400 million "to fund projects generally related to ancillary operations with self-supporting revenue streams." This probably means that all future building for academic purposes will have to pay for itself and thus privilege academic programmes with "full-cost" recovery.
One of the implications of raising capital through private or public bonds is that York now has a credit rating. Both York and UBC were given bond ratings of AA-/stable by Standard and Poor's while the U of T was rated an AA+/stable and Brock University an A-/stable. York paid a fee to S & P for a presale rating of York's financial worthiness. The report on York is available on S & P's website. The University gave S & P a private briefing on York's financial situation and trends affecting its future revenues. Since all of the bonds have been sold privately, it is unclear whether the University will continue to pay the rating agency for future assessments of credit risk. If raising capital through bonds becomes common, we should expect more frequent ratings by bond agencies like DBRS, and S & P.
Bond holders cannot exert direct pressure on York's management in the way that the common shareholders of a firm meet to vote their shares and confirm or oust the company's directors and management. But if future funds are to be raised in this way, York must continue to secure high credit ratings from the bond rating agencies or else be subject to higher interest costs. There will now be some additional pressure for the University to conform to the understandings, definitions and expectations of the bond rating agencies and to follow management strategies that may diverge or conflict with our primary educational responsibilities. As an example, the pressure to raise revenue from commercial sales, rents, parking and the like will intensify, arguably taking effort, talent and resources such as space, staff support, etc., away from the central activities of education and research.