Welcome to College Confidential!

The leading college-bound community on the web

Sign Up For Free

Join for FREE, and start talking with other members, weighing in on community discussions, and more.

Also, by registering and logging in you'll see fewer ads and pesky welcome messages (like this one!)

As a CC member, you can:

  • Reply to threads, and start your own.
  • Post reviews of your campus visits.
  • Find hundreds of pages of informative articles.
  • Search from over 3 million scholarships.

Amherst to issue $100 million in taxable bonds for working capital

interesteddadinteresteddad Registered User Posts: 24,177 Senior Member
edited April 2009 in Amherst College
Amherst is issuing $100 million in taxable bond issues to be used as working cash (as opposed to the tax-exempt bonds tied to specific capital building projects LACs usually issue). This is related to the lack of liquidity in their endowment and the $500 million in cash call commitments from private equity and hedge fund partnerships.

S&P's is leaving the highest possible bond ratings in place, but forecasting a negative outlook for future bond ratings, i.e. watch for a downgrade.

Amherst started the fiscal year in July with $172 million in debt. With this bond issue, they will have borrowed $150 million since the New Year -- $50 million in tax-exempt (for the ongoing dorm rennovation projects) and this $100 million in working cash.

S&P: Amherst Coll, MA's Debt Outlook Revised To Negative On Possible Liquidity Concerns
Amherst Coll, MA's Debt Outlook Revised To Negative On Possible Liquidity Concerns

SAN FRANCISCO Feb. 18, 2009-- Standard & Poor's Ratings Services revised its outlook to negative from stable and affirmed its 'AAA' and 'AAA/A-1+' ratings on the Massachusetts Health and Education Facility Authority's outstanding debt, issued on behalf of Amherst College. In addition, Standard & Poor's assigned its 'AAA' long-term rating to the Trustees of Amherst College's $100 million taxable bonds, series 2009A, also issued on behalf of Amherst College.

"The negative outlook reflects possible liquidity concerns in the near term, as evidenced by the college's need to issue long-term debt ($100 million) to meet its working capital needs," said Standard & Poor's credit analyst Jessica Matsumori. "In addition, Amherst has experienced a substantial decline in financial resources, as well as deterioration in its investments due to recent market turmoil."

Proceeds from the series 2009A bonds will be used primarily to fund working capital at the college. The bonds are expected to be issued as fixed-rate debt, with a bullet maturity at the end of 30 years. Bond proceeds will be used in lieu of cash from the endowment to meet operational needs at the college over the next two years.
Post edited by interesteddad on
«134567

Replies to: Amherst to issue $100 million in taxable bonds for working capital

  • acsophacsoph Registered User Posts: 19 New Member
    That is kind of surprising, having to take on taxable debt, but I don't see it as a real sign of trouble. Rather, it's a side effect of the aggressive, rather illiquid (particularly right now!) investment strategies of our endowment managers, in things like private equity, timber, etc. Had we stuck to more conservative, liquid asset classes like equities and bonds, we could not have had such killer growth in the endowment for the last several years (save this one, though my understanding is we're still outperforming by a nice margin). Also, it's worth noting that Amherst practically mints money every time it maxes out those huge untaxed building loans--those are just a smart opportunity in any situation, so it's not like Amherst is piling up debt it can't repay.

    Every lender is worried about every counterparty these days, so in relative terms, I'd say AAA with a negative outlook is still pretty darn good. I guess it's just proof that even the best-capitalized institutions can't sail through this crisis unscathed.
  • interesteddadinteresteddad Registered User Posts: 24,177 Senior Member
    it's worth noting that Amherst practically mints money every time it maxes out those huge untaxed building loans--those are just a smart opportunity in any situation

    Live by the leverage on the way up, die by the leverage on the way down.

    Let's take Hypothetical College that issued $100 million in tax-empt bonds a year ago to build a new science center instead of paying cash from endowment. Not only do they have to pay interest on the $100 million, but they only have $70 million to show for it after the borrowed $100 million lost 30% in the markets. They would have been better off paying cash for the science center before the market crash.

    Of course, hindsight is 20/20.
  • JW MullerJW Muller Registered User Posts: 432 Member
    Amherst announced with fanfare in April 2008 [DJIA: 12,600] that it would extend its need blind policy to International students. In February 2009 [DJIA: 7,366], a hard-pressed Amherst might need to reappraise International need-blind, if not non-International as well. Amherst sent out a press release when the Board of Trustees voted to extend need-blind, but what if need-blind is retracted? Not the sort of thing that is put in a press release. Does it need a recorded vote of the Board of Trustees? Is it put in writing? An internal memorandum? Maybe it is in the bond prospectus.
  • FauxNomFauxNom Registered User Posts: 1,220 Senior Member
    I wonder too, JW. Reading all of this fascinating info about LACs and the financial crisis (thanks, I-dad) has made me think about what would be the logical next steps for these elite colleges. Obviously first will be putting the brakes on capital projects, freezing salaries, probably freezing hiring, trimming operating expenses. But next? Does anyone think Amherst or its peers will:

    become need-aware for internationals?
    become need-aware for domestic students?
    begin gapping - not meeting 100% of need?

    For slightly lower-tier colleges that attract students with merit aid, will they stop or cut merit aid?
  • JW MullerJW Muller Registered User Posts: 432 Member
    Those purchasing the bonds will be interested in the prospects for the tuition revenue stream. The prospectus may have information about future tuition revenue, with projections of percent of students paying full freight. For example, if International Students are projected as paying full freight, it would indicate a silent rescinding of need-blind.

    Where to get the prospectus though?
  • JW MullerJW Muller Registered User Posts: 432 Member
    I poked around, and found a a bond prospectus from 2005. It tells investors (page 37), that "the college admits students without regard to their ability to pay". The the lister of the bond has no more recent Amherst bond official statements, although there are more recent Amherst bonds. I don't know if Amherst would need provide a more recent official statement for their new bonds offerings.

    If there is a more recent official statement, it would need be scrutinized for fudging or a missing statement about need-blind admissions.
  • interesteddadinteresteddad Registered User Posts: 24,177 Senior Member
    "Need-blind" and "need-blind for internationals" do not necessarily change the percentage of students receiving financial aid. There is a bit of marketing lingo at work here.

    Having said that, the actual technical definition of "need-blind" is prior board approval to spend whatever sum is necessary on financial aid as opposed to working with a fixed budget.
  • interesteddadinteresteddad Registered User Posts: 24,177 Senior Member
    But next? Does anyone think Amherst or its peers will:
    become need-aware for internationals?

    Amherst was only the second LAC to go need-blind for internationals. Williams was the first. Not out of the goodness of their hearts, but because they were getting clobbered in trying to attract internationals. Even with the need-blind policy, they only enroll the same percentage of internationals as Amherst and Swarthmore, but they are spending twice as much in aid to do so. International enrollment is incredibly expensive.

    Amherst was matching Williams' play. Swarthmore was considering it, but no way no how now. I strongly suspect Amherst and Williams will backtrack on this one.
    become need-aware for domestic students?

    No. Not officially. Amherst, Williams, and Swarthmore will stay need-blind. Almost everyone else will become more need-aware. The fact of the matter is that every college in the United States has been and will continue to seek full-pay or nearly full-pay students. That's what merit aid is all about.
    begin gapping - not meeting 100% of need?

    No. Not at Amherst, Williams, or Swarthmore. If they need more tuition revenue, they'll just quietly enroll 2% more full pay students and say, "oops, it was just a funky yield this year...."
  • acsophacsoph Registered User Posts: 19 New Member
    I-Dad: your point about the borrowing for big, questionably important building projects is well taken. Amherst has disgorged many millions in the last few years to gut and re-do several dorms (with inexplicably thin walls and doors, though), and I'm sure the trustees are kicking themselves right now for that. But I wouldn't say the risks are similar to the risks of leveraged banks. Amherst's liabilities are still a small fraction of assets, and the value of the dorms to the college, once built, has nothing to do with the market: they are worth whatever it's worth to Amherst to have nice dorms. No one was expecting to turn them for a profit. What I meant by minting money was just that it's wise to take advantage of the tax savings on the tax-free loans.

    As for reining in the budget: you're right about enrolling more full-pay students. Amherst has said it will raise the incoming class size by about 25, among other measures:

    "At this time in our planning, we anticipate that the most significant means of adjusting our budget for next year will come from a salary freeze, a reduction in the number of visiting faculty, and additional revenue from 100 more students (over four years)."

    https://www.amherst.edu/aboutamherst/news/statements/node/92775
    This letter from the president, Tony Marx, has more solid information about it.

    They are in serious cost-cutting mode. I know the econ department had already sunk many man-hours into a search for a development economist, and begun to finalize invitations for campus interviews and presentations, when the administration pulled the plug.
  • ModadunnModadunn Registered User Posts: 6,263 Senior Member
    From the same link as above, it was my understanding that Amherst wasn't going to forgo hiring:
    They are loath to completely forgo the opportunity to hire new faculty, particularly at a time when many other peer institutions may not be competing with us for those hires. The board is therefore encouraging us to plan for growth in the faculty above replacements. And because trustees believe that faculty should pursue scholarship and creative work at the highest level, and understands that many have made plans based on expectations of the new sabbatical policy, they have agreed that Amherst will guarantee 100 percent sabbatical pay for all eligible faculty, including senior faculty, for 2009-2010.

    This doesn't necessarily fit with Acsoph's comment above re: the econ dept pulling the plug.
  • interesteddadinteresteddad Registered User Posts: 24,177 Senior Member
    Hey, "I am loath to completely forgo the opportunity" to buy a new car, but that doesn't mean a new car is in my plans anytime soon!

    These collegiate economy-response e-mails are so full of spin you get dizzy reading them. Have you noticed that every college in America is better positioned than most to withstand the economic challenges? They must all have campus locations on the shores of Lake Wobeegon.
  • FauxNomFauxNom Registered User Posts: 1,220 Senior Member
    ^^ Too true! Unless you're in the public realm, where the PR campaign is aimed at explaining to the legislature how badly the institution needs help. PR, but more honest, I think.
  • toadstooltoadstool Registered User Posts: 1,145 Senior Member
    Paying short term expenses with long term money is a classic sign of an organization about to go under. No trained fin or eco guy would ever recommend buying the Amherst College bonds.

    And college will go under if they don't get their financial heads on straight.
  • interesteddadinteresteddad Registered User Posts: 24,177 Senior Member
    Amherst is not a college that is in ANY danger of going under. There will be some colleges that go out of business in this cycle, but they won't be the colleges that have their own sections on College Confidential and they certainly won't be among the six liberal arts colleges with Aaa Moody's bond ratings.

    Having said that, the $503 million in cash call commitments and the cash flow problems those are creating is a serious problem at Amherst with potentially long-term implications. I don't know what interest rate they are paying on that $100 million in taxable bonds, but figure the debt service adds millions a year to the operating budget, forcing even more cuts elsewhere.
  • pan1956pan1956 Registered User Posts: 528 Member
    Interesteddad, I do not understand.
    You say "Amherst, Swarthmore and Williams will stay need blind." And you follow with "the fact is that every college in the US has been and will continue to seek full pays." So which is it? Are full pays applicants advantaged at these schools or not?
«134567
This discussion has been closed.