With bond sale, University debt grows to $2.75 billion

To help finance major projects in its 10-year capital plan, the University issued $250 million in tax-exempt bonds on Jan. 20.

The bonds will help fund construction of new buildings for the chemsitry department and the Princeton Neuroscience Institute as well as major renovations to Jadwin Hall and Firestone Library, University spokeswoman Cass Cliatt ’96 said in an e-mail.

Construction projects are paid for through the University’s capital budget, which is separate from the University’s annual operating budget. In addition to debt sales, capital-budget income also comes from gifts to the University, endowment income and transfers from the operating budget.

"[Because] no gift ever covers the entire cost of a project ... this annual process of issuing bonds enables the University to pay for [the] project over the life of the building,” Cliatt explained.

The University has previously sold $2.5 billion in outstanding bonds, and January’s sale brought the University’s total debt to $2.75 billion. Though this debt sale came roughly 16 months after the previous tax-exempt bond sale, such sales are generally made annually, Cliatt said. The schedule for issuing bonds varies according to how quickly the University spends proceeds from previous bond sales. The University has been issuing tax-exempt bonds since the 1970s, Cliatt said.

The University’s use of bonds is similar to a homeowner buying a mortgage, Cliatt explained. Homeowners rarely pay the price of a house in one payment — they instead spread the expense over a set number of years by taking out a loan. By issuing 30-year bonds, the University can spread construction and renovation costs over three decades.

The latest bonds were issued through the New Jersey Educational Facilities Authority and sold at a 4.03 percent total interest rate to JPMorgan Chase & Co.

Cliatt said the University is “very pleased” with the interest rate the sale garnered.

“We're in a very low fixed-interest-rate environment, so we were expecting to get a very favorable blended interest rate,” Cliatt added.

Ahead of the latest sale, the University was given an AAA bond credit rating — the highest level — indicating that rating agencies consider the University’s debt to be low-risk.

The tax-exempt bonds differ from the $1 billion in taxable bonds that the University issued in January 2009. Some of the money from that debt sale was used to pay for operating expenses, following losses to the endowment. On taxable bonds, the University has more flexibility to spend the money, whereas stricter rules regulate tax-free bonds.

The University’s yield rate is more favorable than those of some peer institutions. On Tuesday, Yale sold $530 million of tax-exempt bonds. Yale must pay a yield of 4.24 percent on its 30-year bonds, which comprised $150 million of the total offering.