Debt forces Harvard back to drawing board
Facing big payments, school reduces, rethinks major projects
By Beth Healy
Globe Staff / September 28, 2010
It is no secret that Harvard University ran into a short-term cash crunch when the markets plunged in late 2008 and had to cut costs sharply. But there also has been a longer-term toll: Harvard borrowed heavily to get through that period, and now finds itself grappling with big debt payments and scaling back ambitious plans.
The nation?s wealthiest university doubled its debt load over the last three years, to $6 billion. It spent $204 million to pay down its debt in fiscal 2009, or 40 percent more than the prior year ? money that deans would rather have spent on projects and programs. And Harvard is now spending a larger slice of its $3.8 billion operating budget on debt service than its peers.
All of this puts the university?s president, Drew Faust, in the unenviable role of seeing Harvard through much leaner times than her predecessors, who enjoyed large endowment returns for more than two decades.
?We are managing debt very carefully right now,?? Faust said in a meeting with Globe reporters and editors last week. She also acknowledged, ?We?re paying a significant amount of the operating budget in debt service.??
Harvard is maxed out on debt for the foreseeable future. In order for the university to keep its AAA bond rating, its usual way of financing buildings, borrowing from investors, is effectively off the table for now, beyond projects already identified in its three-year plan.
Little wonder that Harvard?s Allston science facility project, once pegged as high as $1.4 billion, was halted in early 2009 and is now back to the drawing board in terms of scale and scope. The university has told its bond raters it won?t borrow more than a total of $1 billion over the next three years, including projects that are already underway.
Faust indicated that new plans for Allston will be presented by the middle of next year, and the university may need investment partners.
Samuel L. Hayes, a retired investment banking professor at Harvard Business School who serves on a number of business and educational boards, said Harvard is probably looking to show its investors and alumni that it is taking a conservative view of its finances.
?I see this is a manageable problem,?? Hayes said. ?But it?s a situation that the university hasn?t found itself in for a long, long time. It?s a new world for the university.??
The leaner times didn?t result only from the 27 percent plunge in the endowment, and the $1.8 billion in cash Harvard lost by investing it alongside the endowment. It was the $2.5 billion in debt the university issued in fiscal 2009 to help deal with those losses and other soured investments. The borrowing helped mitigate the cash problems that led to layoffs and budget cuts, but also came with a longer-lasting price tag.
The Business School, in its annual report for 2009, said it might encounter ?restraints?? in its ability to borrow from the university. To maintain its AAA rating, ?the University?s ability to assist HBS and other Harvard schools with debt financing may be limited,?? the business school?s chief financial officer, Richard P. Melnick, wrote.
Other Harvard schools have high-profile construction in progress, such as the law school?s Northwest Corner building, which is slated to cost about $250 million and was started before the financial crisis. Harvard Law raised $55 million from donors for the project, according to a Harvard Magazine story, and raised much of the rest in a debt offering this year. Harvard?s Fogg Museum, an art museum which is doing a $400 million rebuild slated to be completed by 2013, has raised more than $70 million from donors but has not raised any money in the public debt markets.
Harvard said it is now requiring higher levels of fund-raising from donors before a project can start. ?Like all universities, Harvard is adjusting to the new financial environment,?? spokesman John Longbrake said.
A report by the bond rating firm Standard & Poor?s earlier this year confirmed Harvard?s top AAA grade and declared its outlook stable, based on ?the institution?s stated strategy of slowing down the issuance of debt.?? The analysts were optimistic about Harvard?s finances, thanks to its prestige and deep pockets. But they said the outlook could change in the event of a ?loss of additional financial resources, a failure to balance operating performance during the next two years, or a significant increase in debt beyond current levels.??
Ratings matter because they affect how much it costs to raise debt. The institutions with the best ratings get the lowest rates because they are deemed the least risky for investors, and most likely to repay their debts.
Harvard has significant debt it needs to refinance or pay off over the next several years, following past years of expansion the bond raters called ?highly aggressive.?? About $17 million is coming due yearly through 2012. After that, sums shoot up to $188 million in 2013 and $519 million in 2014.
Even by Harvard?s historic measure, its debt levels are high ? at 13.3 percent of total assets. Standard & Poor?s said that among AAA-rated schools (which include the likes of Yale University and MIT) the median portion of operating budgets devoted to debt service is 4 percent. Harvard?s payments represented 5.4 percent of its budget.
Past Harvard presidents had the luxury of counting on oversized returns from the university?s massive endowment, now at $27.4 billion, to help pay for projects and debt service. Faust probably does not. The fund rose 11 percent in the year ended in June 2010, beating rival Yale but not the stock market. Looking ahead, Faust said, Harvard is facing a level of debt where, ?we need to be mindful.??
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