Harvard University saw strong market reception to $750 million of taxable corporate CUSIPs Tuesday, becoming the latest prestigious university to tap the muni market due to pent-up capital needs amid a steadier rate environment.
Goldman Sachs priced for the Presidents and Fellows of Harvard College (Aaa/AAA//) $750 million of taxable corporate CUSIPs, Series 2024A, Tuesday. The deal was being shopped initially at +65 U.S. Treasuries, went out in preliminary wires at +60, and finished at +47.
The university also plans to come to market again in April through the Massachusetts Development Finance Agency with $817.2 million of Series 2024B tax-exempt revenue bonds. The proceeds will be used for new capital projects and may also include refinancing.
The university slowed their capital spending during the pandemic and “now has built up to their full capital spending and they hadn’t borrowed in a few years so that’s more why they’re going into the market now,” said Laura Kuffler-Macdonald, the analytical manager on the higher education team at S&P Global Ratings and the primary analyst on Harvard.
S&P affirmed its AAA rating for both Presidents and Fellows of Harvard College and the Massachusetts Development Finance Agency, as it reflects “Harvard’s significant cash and investments compared with debt outstanding.”
Despite the “heightened attention and scrutiny the university has faced in recent months,” along with the resignation of President Claudine Gay, S&P views the university’s “aforementioned financial resources as a strength that helps to mitigate the near-term credit impact of these challenges facing the university.”
It was unsurprising that Harvard’s taxable deal saw “good execution,” and strong demand, said Patrick Luby, senior municipal strategist at CreditSights.
“With spreads for investment grade corporates very tight, if you need to raise money, there’s an appetite in the taxable bond market,” he said. “So it is an advantageous time for these schools … to go ahead and borrow.”
And due to market conditions, issuers planning to price taxable deals could “come to market now, even though they don’t necessarily have it all mapped out how they’re going to spend [the proceeds],” he said.
With the influx of taxable
Harvard is not the only Ivy League to tap the muni market as of late.
Princeton University came to market in February through the New Jersey Educational Facilities Authority with a combined $1.47 billion of revenue bonds —
The proceeds will be used for various capital projects and to refinance Series 2014A bonds for savings.
“Princeton is the triple-A of triple-As, with enormous wealth for its modest size,” CreditSights strategists said.
The university has a “world-renowned brand” despite its modest size of 8,400 students. And with only 4% of applicants accepted, it gives Princeton “nearly unlimited pricing power,” they noted.
“Princeton has flexibility with respect to timing and amount when accessing the municipal bond markets,” said Jennifer Morrill, director of media relations at Princeton, in a statement. “In the current environment, we see tremendous value in the muni market, given the continued roll-out of our capital plan.”
Harvard and Princeton coming to market is a “huge sign of confidence,” said Clare Pickering, a Barclays strategist.
Several factors contributed to the two schools coming to market with billion-plus deals within weeks of each other.
Last year was the “lowest point for muni issuance,” with higher education following the same broader muni trend, said Emily Wadhwani, senior director and sector lead at Fitch Ratings.
Higher education issuance fell 16.8% in 2023 to $20.813 billion from $25.021 billion in 2022, according to LSEG data.
While there are still relatively “unfavorable” differences compared to the past several years, they are easing and for those rated in high double-A and triple-A rating space, the differential is “palatable,” she said.
There is also less liquidity in certain investments and market performance, particularly real estate and private equity, has been challenging, Wadhwani said.
The prestigious universities and larger institutions would have “a meaningful amount of investments in those more aggressive and less liquid assets,” she said.
All of these things may push issuance higher than it might have been.
“We expect to see some pickup in issuance across rating categories, but the first movers tend to be the ones with the highest credit strength and that’s why we’re seeing the Harvards and the Princetons get out in the market,” she said.
Harvard and Princeton are highly rated “blue chip” schools with enormous endowments that always have improvement and various capital projects underway or planned, Luby said,
“There’s generally an ongoing appetite for capital to finance projects,” he said.
“It makes sense,” Pickering said of the two schools coming to market with such large deals. “They have expansive campuses, incredible buildings that need to be maintained and stadiums and facilities, athletic or residential, across all the different schools.”
There also tends to be more financial flexibility for a lot of those institutions when coming to market, said Jessica Wood, managing director at S&P, compared to other universities, both large and small, who have more regular needs.
However, many universities are more cyclical in coming to market, Wadhwani said.
While those at the “top of the rating scale” have the luxury of being “somewhat agnostic” to market movements, they still need to come to market regularly, such as the Regents of the University of California, she said
The issuer came to market in January with
Jefferies priced and repriced for the Regents of the University of California (Aa2/AA/AA/) on Tuesday $1.092 billion of general revenue bonds, 2024 Series BV, with yields bumped up to five basis points from the preliminary offering: 5s of 5/2024 at 3.00% (unch), 5s of 2029 at 2.24% (-5), 5s of 2034 at 2.45% (-2), 5s of 2039 at 2.91% (-4), 5s of 2044 at 3.33% (-5) and 5s of 2045 at 3.38% (-5), callable 5/15/2034.
While the Regents of the University of California can have some wiggle room when to come to market, the issuer have regular capital needs and “infusions,” so they tend to come to market several times a year to accommodate that.
The Regents of the University of California came to market twice last year —
“It’s not unusual to have a relatively standard timeline within which you go to market,” Wadhwani said. “You may shift a little bit … but the need to regularly access that capital is pressing enough to keep those cycles going, even when market conditions are more or less favorable.”
Market participants are split on whether these large deals will prompt other prestigious universities and top-tier institutions to come to market.
Wadhwani is unsure if this is a trend that will continue, reiterating that many universities are more cyclical in coming to market.
Additionally, she said coming to market “comes down to liquidity of your investment portfolio overall and other capital needs.”
And the reason why top-tier schools are coming to market with large deals could be a function of size, with larger schools having more regular capital needs than smaller institutions.
The muni market is also coming off a period of “somewhat anemic debt issuance,” and some of the larger deals coming to the market are from universities “catching up” on borrowing, Wadhwani said.
However, Pickering said the timing might make sense for large institutions to come to market.
Along with the regular “wear and tear” and technology needs of higher education, there is some stability in the market during a time before Fed rate cuts and months after of the presidential election in November.
“They’re all great names, all have understandable needs and the market will welcome it,” Luby said.
“Now these other blue chip schools will be watching,” he said “That will get attention, and those large blue chip schools will have no problem selling debt into the market.”