Correction appended
The College plans to issue more than $400 million in bonds by mid-June to pay for campus construction projects and fund a cash reserve, according to executive vice president for finance and administration Adam Keller. By issuing bonds, the College will effectively borrow money from investors, agreeing to pay the funds back on a fixed schedule and with a fixed amount of interest. The bond issue has been part of the College's long-term financial plan for several years, Keller said, and follows a 2006 bond sale that funded the Tuck Living and Learning Center and several other construction projects. College officials had originally planned to issue the bonds in 2008, at which point they had confirmed Dartmouth's triple-A rating, the highest possible credit rating, Keller said. This rating indicates that the College's investors can be confident that there is minimal risk the College will default on the debt The bond issue was delayed after it became apparent that budget concerns would result in a postponement of construction. The College will first issue $165 million in tax-free bonds to pay for campus construction projects and will later issue $250 million in taxable bonds to fund a cash reserve, Keller said. Keller said he expects to receive the credit agencies' reports, which must be made public before the sale can proceed, early this week. Barclays and Morgan Stanley, the two investment banks that will market the bonds, should then be able to announce the tax-free sale by the end of the week, Keller said. The tax-free bond sale will likely take place during the first week in June, he said. Administrators have not yet chosen a bank to handle the taxable bond sale, though Keller said he is currently negotiating with "more than two" firms for the best offer and expects to see those bonds sold by the second week in June. The lion's share of funds acquired through the tax-free issue $121 million will support the construction of the Class of 1978 Life Sciences Center, Keller said. The recently completed renovations to New Hampshire residence hall will require $12 million, and an additional $12 million will fund a project to replace the boiler and increase capacity at the College heating plant. "We think that this is a good time to issue bonds," Keller said. "We never want to issue until we need the money. We need the money now." The balance of the funds will be used for miscellaneous projects, including renovations to the President's House and the loading dock at Spaulding Auditorium, as well as a $5-million renovation to laboratory facilities at Dartmouth Medical School, he said. The taxable bond sale will provide a kind of "contingency" fund for the College, Keller said. Should the College need cash quickly to cover operating expenses in case of an endowment decline, for example it would have a reserve to draw from. This bond sale will also help the College fulfill investment agreements with several companies that manage part of the endowment. These agreements allow the companies to call on Dartmouth for cash to invest, Keller said. As a result of the bond issue, the cash will not have to be withdrawn from the endowment. "Most of those commitments we've made, they're not calling for anything right now," Keller said. "But if, all of a sudden, the economy improved hugely, and there were great buying opportunities that existed, we might get sort of a run on the bank." Keller said he does not expect the College to have to draw on this reserve fund in the near future. The distinction between tax-free and taxable bonds does not apply to the College, but to the investors who are effectively loaning the College money by purchasing the bonds, Keller said. If investors buy bonds that are designated for a tax-free purpose, like construction, they do not have to pay taxes on their investment. Both types of bonds will carry interest rates between 5 and 6 percent, with a 30-year maturity date, meaning that the funds will be repaid over a 30-year schedule, Keller said. While interest rates for tax-free bonds have not declined over the past few months, the market for taxable bonds has "gotten quite a bit better," as debt investors have become used to bond sales by stable colleges and universities, Keller said. Harvard University was one of the first universities to sell taxable bonds during the recent downturn, borrowing $1.5 billion last December, Bloomberg News reported. Princeton University, Stanford University and Duke University followed soon after, with Princeton borrowing $1 billion in January and Duke selling bonds worth $500 million, according to media reports. Princeton's bond issue was a way "to borrow funds for operating expenses," instead of selling endowment holdings at a reduced value, Princeton spokesperson Emily Aronson said in an e-mail to The Dartmouth. Representatives from Harvard, Stanford and Duke did not return requests for comment by press time. Keller said that borrowing money for needed spending at a 6-percent interest rate is preferable to relying on endowment funds and foregoing the projected 8- to 10-percent growth in the endowment's value. The College has historically received triple-A ratings for its debt, Keller said. Rating agencies, however, have been closely scrutinized, which means "there's no guarantee" that Dartmouth will receive that rating, he said. If the rating changes, Keller said he is confident the College's offering will still be rated high-grade debt. Any reduction in rating would only increase bond interest rates by a few tenths of a percent, he said. Most of the bond buyers will likely be financial institutions, including banks, mutual funds and insurance companies, Keller said. He added that he has also received inquiries from the University of Vermont and from individuals at other colleges and universities who have asked to be notified when the debt will be issued. Officials at the University of Vermont could not be reached by press time.
