This week, as the shock wave from the Wall Street meltdown reverberated worldwide, the University took a direct hit.
University Controller Kenneth Molinaro told Bloomberg News on Wednesday that interest rates on some of the bonds issued by Princeton have more than quadrupled in the last week, costing the University about $8,000 per day. Through bonds, investors give the University cash in exchange for the University’s promise to repay the principal amount of the bond plus interest.
The University offered $75 million worth of variable-rate bonds through Lehman Brothers, the failed investment bank that filed for bankruptcy on Monday. The interest rate on these bonds has risen from 1.55 percent on Sept. 9 to 8 percent on Wednesday.
University Vice President for Finance and Treasurer Christopher McCrudden attributed 2 to 3 percent of this increase to the Lehman’s collapse, and Bloomberg reported that interest rates across the bond category in question have risen dramatically as financial institutions try to retain potential investors by offering higher rates of return.
The University has issued more than $200 million of debt in the form of variable-rate bonds. Besides the $75 million brokered by Lehman, the remaining amount is brokered by Merrill Lynch and Morgan Stanley. The rates on notes traded by those institutions have also jumped, to 4 and 4.5 percent, respectively.
Bank of America announced its intent to purchase Merrill Lynch on Sunday, eliminating any hope that the former would come to Lehman’s rescue.
Compounding its interest problem, the University was also forced to liquidate $5 million in non-endowment assets to repurchase unsold bonds this Monday.
Under normal circumstances, Lehman would purchase these unsold bonds at the end of daily transactions to guarantee that the University receives the full amount of the bond issue. But since its collapse, Lehman no longer has capital available to buy up leftover securities, McCrudden told The Daily Princetonian on Wednesday.
Lehman spokesperson Mark Lane did not respond to requests for comment.
University spokeswoman Cass Cliatt ’96 said that the University issues debt to pay for capital projects that fail to attract donors. While she noted that “a lot of new construction is funded by University gifts,” maintenance and renovation projects must often be paid for within the University’s operating budget.
Cliatt added that this money is separate from endowment funds used to fund financial aid and other long-term projects.
The University’s reaction
The University is negotiating for a new bank to begin trading the notes that had been handled by Lehman, he explained, adding that he expects “everything to be up and running” at some point today.
While the University historically “looked at the financial strength or market performance” of financial institutions when choosing a partner for capital programs, McCrudden said that in the process of choosing a new partner this week, the University has prioritized looking “very carefully at the balance sheets.”
The University is also considering changing the interest rate structure from daily to weekly re-pricing on bonds traded by Merrill Lynch, Morgan Stanley and the new bank. McCrudden said that if the University decides to implement this change, it would do so early next month.
McCrudden said that he is “certainly not as comfortable as [he] was a week ago” about the variable-rate trading structure but explained that the University is not looking to transfer its debt to a completely different program.
“I continue to believe that, if you look at historical patterns, these are good programs to be in,” he said, adding that the University has paid as low as .25 percent interest on bonds in recent years.
The University currently holds between $150 million and $250 million in non-endowment working capital in addition to liquid holdings in the endowment, McCrudden said, explaining that the University tapped into the former to repurchase the $5 million worth of its bonds that Lehman could not sell.
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