<p>Why would bondholders call in Amherst’s bonds?</p>
<p>I find it hard to believe that Rates have gone up on those bonds.</p>
<p>[A</a> Rush Out of ‘Junk’ - WSJ.com](<a href=“A Rush Out of 'Junk' - WSJ”>A Rush Out of 'Junk' - WSJ)</p>
<p>If this continues this will have a very serious impact on endowments. Given that PE investments are highly leveraged they depend heavily on availability of junk bonds and their interest rates. With the IPO market drying up as well there is a big problem turning all these PE investments into cash.</p>
<p>I thought Amherst’s bonds were highly rated.</p>
<p>What was the interest rate on those bonds?</p>
<p>dstark-my impression is that the problem comes from whoever holds the demand bonds needing cash themselves. For example many hedge funds are getting big redemption requests and need to cash in their most liquid investments. These demand bonds are an easy target-Amherst is required to cash them in immediately upon request. Moody’s notes that Amherst has over $200M in demand bonds which compared to their annual operating budget of around $135M is far too high.</p>
<p>One problem for a school like Amherst is that going to a fixed rate longer term taxable bond might increase their rate of interest by 3-4 percentage points so $200M x .04 is $8M more in annual expenses which hurts a school with a $135M annual budget.</p>
<p>I see…thanks…</p>
<p>I don’t know why Amherst would sell these bonds…I wonder how much they are saving in interest costs.</p>
<p><a href=“https://www.amherst.edu/share/1/331686[/url]”>https://www.amherst.edu/share/1/331686</a></p>
<p>I’m no expert on bonds, but I believe that these variable rate demand bonds are basically a tax-free cash-equivalent investment. Normally, there is an active secondary market so cashing out a position is more or less a routine transaction. But, there are specific interest rate scenarios is this volatile mareket that freeze the liquid market and force colleges to rebuy these things. It happened right after the market crash in 2008 when many colleges were dealing with demand calls for a few days. </p>
<p>Amherst is really vulnerable. Not only do they have very high debt ($313 million), but a huge percentage is variable rate demand ($209 million). Contrast to Swarthmore College that has $177 million in total debt and $0 variable rate demand debt (they converted their last bit to fixed rate debt the summer before the market crashed in 2008 because they didn’t like the volatility they were seeing in the credit markets.</p>
<p>Why does Amherst need to remarket these bonds instead of just lowering their debt? They need the cash. They already borrowed $100 million taxable two years ago. Huge cash call commitments and, because they self-insure their variable rate demand bonds, they must have cash liquidity to cover a demand call.</p>
<p>Here’s the Moody’s report for non-subscribers:</p>
<p>[BondsOnline:</a> Credit Ratings for Municipal and Corporate Bonds](<a href=“http://www.bondsonline.com/Todays_Market/Credit_Rating_News_.php?DA=view&RID=18922]BondsOnline:”>http://www.bondsonline.com/Todays_Market/Credit_Rating_News_.php?DA=view&RID=18922)</p>
<p>Not bellybutton research.</p>
<p>[WARF</a> - WARF Annual Report](<a href=“http://www.warf.org/news/index.jsp?cid=59]WARF”>http://www.warf.org/news/index.jsp?cid=59)
[Wisconsin</a> Institutes for Discovery - Overview Home](<a href=“Discovery Building | Wisconsin Alumni Research Foundation”>Discovery Building | Wisconsin Alumni Research Foundation)
[University</a> Research Park (URP) | University of Wisconsin Madison](<a href=“http://www.universityresearchpark.org/]University”>http://www.universityresearchpark.org/)</p>
<p>Universities all across the country do, or are trying to do, the kind of technology transfer that UW-Madison has been doing for decades.</p>
<p>Good post barrons.</p>
<p>I think both Swarthmore and Amherst are in good shape. I would buy their bonds if the interest rates were higher…the fact that their bonds have low interest rates reflect the fact that these are very solid institutions.</p>
<p>Even bigger than hedge funds, money market funds are apparently huge purchasers of these variable rate demand bonds because the ability to cash them in with a few days notice helps them manage their own liquidity commitments.</p>
<p>Here are a couple of primers:</p>
<p><a href=“Invesco | Performance”>Invesco | Performance;
<p>[Variable</a> Rate Demand Bonds - Liquidity Issues - Publications - Barley Snyder LLC Attorneys At Law](<a href=“http://www.barley.com/publications/article.cfm?article_ID=283]Variable”>http://www.barley.com/publications/article.cfm?article_ID=283)</p>
<hr>
<p>I don’t understand the credit markets, but I believe there was a day during the crash of 2008 when the interest costs to college on these things shot up to 12% because there were no buyers. I believe this is why Morty Schipiro at Williams was expressing dire concerns well out of proportion to Williams’ financial situation. If that short term abberation had continued, the liquidity crunch was going to be brutal.</p>
<p>thanks for the links…i will read them when i get a chance…</p>
<p>OK, from Amherst’s June 2010 annual report, their interest rate costs on variable rate debt for the year ranged from 0.05% to 2.75%. Their interest rate costs on fixed rate tax exempt bonds ranged from 2.5% to 5%. The interest rate on the fixed taxable borrowing was 5.75%.</p>
<p>The bonds that got called were the Series H bonds with interest payments of 0.48% to 2.85% last year. Another big batch of $50 million (Series K) is scheduled for remarketing in January (2.75% interest last year). This last one is a recent debt offering from 2009, I believe use to finance some of the recent dorm construction. These will be refinanced at when the initial term interest rate expires in January.</p>
<p>Guess Xiggi has moved back to general unprovable trashing of public research universities and everything they stand for.</p>
<p>interesteddad, thanks for the links…</p>
<p>I guess it comes down to lower interest rates costs for the issuer and liquidity for the buyers…</p>
<p>and Amherst maybe has letters of credit so they can fund the puts…if Amherst’s does I wonder what the interest rate costs are for the letter of credit.</p>
<p>I guess Amherst thinks the interest savings are worth it…</p>
<p>If rates ever rise…I guess a lot of these bondholders would exercise their puts…probably not a problem for awhile…</p>
<p>
</p>
<p>Reading between the lines of the Moody’s report, it sounds to me like Amherst perhaps did have to tap a letter of credit to cover a recent bond call. The annual report should answer a few questions.</p>
<p>Biddy Martin must be bummed that she thought she was going to head a small rich school with no financial issues after dealing with funding issues at UW.</p>
<p>IMO, the chairman of the board at Amherst should have responsibility for the financial mismanagement. He’s a finance guy. There was no reason at all for Amherst to pursue such a high risk strategy. They already had one of the top per student endowments in the country. Now, they’ve been forced to dilute the quality of their product with a substantial incease in enrollment.</p>
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<p>Welcome back to the real world. Hard landing ahead for Amherst and others.</p>
<p>[Yale</a> federal funds at risk | Yale Daily News](<a href=“http://www.yaledailynews.com/news/2011/aug/31/financial-crisis-may-hurt-sciences/]Yale”>http://www.yaledailynews.com/news/2011/aug/31/financial-crisis-may-hurt-sciences/)</p>
<p>Timely article</p>
<p>Yale is not going to be the only school affected by spending cuts…</p>
<p>schools are going to have to reinvent themselves…</p>