Back to the Bond Market

Harvard’s new borrowings foretell ambitious new building programs.

Illustration showing the John Harvard Statue against a collage of dollar signs in green

photo collage by jennifer carling/harvard magazine

On March 5, the University placed a new offering of $750 million of taxable bonds, maturing in 2035 and priced to yield 4.609 percent. The new debt (the Series 2024A bonds) is Harvard’s first bond sale since the twin Series 2022 A and B borrowings, totaling about $700 million (including Harvard’s first “green” bonds), and the first undertaken since Ritu Kalra, then assistant vice president and assistant treasurer, became the University’s vice president for finance and chief financial officer, effective last July.

Like the 2022 borrowings, this round is planned in two pieces: today’s sale of taxable general obligation bonds, and a potentially larger tax-exempt placement of revenue bonds—perhaps $900 million—through the Massachusetts Development Finance Agency later this month or in early April (the Series 2024B bonds). The ultimate size of that second tranche depends on market conditions: if interest rates are favorable, the sale will raise perhaps $400 million to refinance a like amount of existing debt placed in 2016. Like the 2022 borrowings, the net proceeds of the new ones will help to fund Harvard’s continuing, large capital program: building new facilities and renovating existing ones.

Financing Harvard at a Tumultuous Time

The new financing—routine practice for the University—of course comes against the backdrop of last autumn’s campus turmoil and the presidential resignation and transition to interim leadership. University critics, who have pointed to a likely decline in philanthropic support, may have hoped that would affect Harvard finances broadly (and of course supporters may have worried that would be the case).

In the event, the financial rating agencies were unconcerned. Standard and Poor’s (S&P), having taken note of those developments and continuing federal investigations related to them, calmly rated the new issues AAA and retained its AAA rating for the University as a whole. The credit analysts wrote, “We believe that both current-use gifts and overall gifts to the endowment could weaken in the near term as Harvard weathers the heightened attention and scrutiny it is currently facing but expect that over the longer term, fundraising will remain robust.” Overall, the analyst projected that “operations will remain positive over the medium term despite any potential decrease in current-use gifts, inflationary pressures, and market volatility.”

Similarly, Moody’s Investors Service gave its top Aaa rating to the University and the new issues. Nodding toward current circumstances, the analysts observed, “Like many wealthy, prestigious peers, Harvard has considerable exposure to governance scrutiny, which contributed to recent leadership transition. A strong institutional governance framework and deep bench of highly skilled administrators provide ample capacity to manage through this transitional period without adverse impacts to credit quality.” Assessing future conditions, Moody’s found “limited risk over the outlook period to Harvard’s student, research, and philanthropic market profiles as well as its strong ability to adjust to potential systemic shocks….”

The markets apparently agreed. The yield Harvard had to pay was just 47 basis points more than the interest rate on 10-year U.S. Treasuries, the benchmark for top-rated credits. According to Harvard’s investment banker, Goldman Sachs, that is the lowest spread on record for an 11-year maturity, and among the 10 lowest spreads on a 10-year maturity ever achieved. That relatively narrow spread reflects investor confidence in the University’s credit quality, along with an appetite for some premium over the yields available in the Treasury market as rates have declined from their recent peak and may be expected to gradually decline further once the Federal Reserve Board is confident that inflation has been reduced to its 2 percent target.

The interest rate on the University’s new bonds is only modestly above the 4.1 percent aggregate cost of its taxable bonds and commercial paper outstanding as of last June 30—no doubt an important factor in the timing of the offering after the past few years of elevated rates. If both the Series 2024 A and B offerings proceed at the size forecast (for gross proceeds of $1.65 billion) and are then followed by the planned tender for part of the Series 2016A tax-exempt bonds, that transaction and other measures would likely result in total bonds and notes outstanding in the vicinity of $7.2 billion as of June 30, 2024. That sum would be up about $1 billion from the fiscal year-end 2023 figure of $6.2 billion, a readily manageable increase for an institution the size of Harvard with its present financial structure.

An Ambitious Building Program across Harvard

The 2022 “green” bonds—so-called because they satisfied criteria for projects that advance environmental sustainability goals—helped to fund the final stages of constructing the Allston science and engineering complex (home to much of the engineering and applied sciences faculty), the second phase of Adams House renewal, and renovation of the Soldiers Field Park housing complex: a mix of new and old. Today’s offering of the taxable Series 2024A bonds is for general corporate purposes: as yet undesignated capital projects.

The offering memorandum noted the planned tax-exempt Series 2024B revenue-bond offering, describing both the prospective bond refinancing and the application of the remaining $500 million of proceeds to fund the following projects (construction of which has been supported in part by commercial paper borrowings, which the new bonds would refinance on a longer-term basis):

•undergraduate House renewal (presumably the final phase of the Adams House renovation, now underway);

•renovation of Harvard Medical School’s Gordon Hall, the marble keystone to the medical quad (with some work described here); and

•construction of affiliate housing in Allston (the apartment tower behind the new American Repertory Theater facility on North Harvard Street).

The scale of Harvard’s own building activity (which excludes the private enterprise research campus now rising in Allston across Western Avenue from the Business School campus) is sufficient to gladden the hearts of Boston-area contractors and construction workers. In addition to continuing costs for Allston-area infrastructure, major projects include the ART and University conference center in process there, plus the planned new economics department quarters in Cambridge—all three donor-funded, at least to a significant degree. Work in the offing ranges in scale from the reglazing of the Graduate School of Design’s extensive glassed exterior spaces at Gund Hall (with major gains in energy efficiency) to a new Business School office building, the Allston “Gateway” facility, and extensive athletics investments (outlined in the recent master plan notification filing with Boston regulators).

Before the pandemic, University capital spending ramped up to more than $900 million annually in fiscal years 2017 through 2019. The spigot was then nearly closed, reducing capital outlays to just $356 million in fiscal 2022. The S&P analysts observed that the outlay for capital projects “has now returned to a more normal spend rate.” Apparently having been briefed on “the current capital plan” for fiscal 2024 through 2029—with references to the many projects listed above—their rating reflects confidence in the scale of the work and the ways Harvard will pay for it. Borrowing is obviously the usual way to pay for long-term capital assets, plus annual depreciation (about $425 million in fiscal 2023), complemented by whatever philanthropic support comes Harvard’s way. Over time, rent (the Allston affiliate housing tower) and room and board fees (House renewal) help defray construction and renovation costs for such facilities, but borrowing for projects which do not generate such revenues must be repaid from general operations.

The Looming Shadow: Eliot House and Kirkland House—and Beyond

Obviously, University fundraisers will attempt to perform their magic to secure funding for some of those projects. But routine maintenance, like the Gund work, is typically part of the Harvard-funded capital plan. That is also likely to be the case for the largest looming project: renewal of Eliot and Kirkland Houses, and the central kitchen complex between them. Adams House renewal posed significant challenges: several separate buildings of varying vintages, and protracted work spread out over the pandemic years.

They pale in comparison to the Eliot-Kirkland project, given the large size of those Houses and their essentially enclosed configuration (making access via crane a major extra expense). Given recent double-digit annual cost increases for Boston-area construction, it would not be surprising if the bill for those joint renovations alone totals well into the high hundreds of millions of dollars—a sum that, unfortunately, inflates by tens of millions of dollars annually. Although donors have named new spaces and uses in prior House renovations, the effect is marginal: it is hard to get philanthropic support for new electrical, plumbing, and ventilation systems, or to bring aging buildings’ exterior envelope up to snuff.

To put the Eliot-Kirkland renewal in context, it is of such a scale as to pose a challenge for the Faculty of Arts and Sciences’ balance sheet overall. As of last June 30, FAS already had nearly $1.3 billion of long-term debt on its balance sheet (mostly incurred for past construction). Although the faculty finally got into a favorable financial position during the pandemic, after more than a decade of straitened circumstances, it has already restructured its debt-servicing obligations to the University, making unrestricted cash available now at the cost of higher repayments in future years.

Borrowing money is no problem for Harvard, nor is servicing the debt a challenge at the University level. But for individual faculties facing huge deferred maintenance costs or the need to reconfigure inefficient or inadequate facilities (think the graduate education and public health schools), the calculations can rapidly become much more daunting.

Read more articles by: John S. Rosenberg

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