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Duke gets $500M in debt issue

Duke issued $500 million in bonds late last month, opting to take on debt rather than liquidate assets in the University's endowment.

The bonds, packaged into two tranches of $250 million each, have maturities of five and 10 years at interest rates of 4.2 percent and 4.15 percent, respectively. The bonds, which sold in one day, garnered bids of $4 billion, said Executive Vice President Tallman Trask.

The sale will afford the University some breathing room after taking losses on its endowment in the mid-20 percent range in fiscal year 2009. Trask told The Chronicle last week that Duke would slash its annual budget by more than $100 million over the next few years in response to investment losses and declines in giving. Duke's endowment, which is managed by the Duke University Management Company, stood at about $6.1 billion on June 30, the end of fiscal year 2008.

"The main reason for doing it is [to] fund the endowment distributions from DUMAC that way and allow them-not force them-to liquidate holdings at bargain basement prices," Trask said. "[The size of the distribution] is down, but it used to be roughly $90 million a quarter."

The first quarterly distribution-the amount withdrawn from the University's managed investment accounts-has been covered by the issuance, and the rest of the cash has been put in conservative investment vehicles, Trask said.

The bonds were underwritten by JPMorgan Chase & Co. and Goldman Sachs.

Duke is not alone in issuing bonds. In some of the highest-profile sales, Harvard and Princeton universities issued $1.5 billion and $1 billion in debt in December and January, respectively, according to Bloomberg News. Both those issues were rated AAA, the highest possible credit rating. The two major ratings agencies, Standard and Poor's and Moody's, rated Duke's bonds AA+ and Aa1, both one step below AAA. Higher ratings indicate a lower chance that the issuer will default on its debt.

But despite the lower rating, Duke sold its bonds at lower interest rates than those schools. Harvard sold bonds with maturities ranging from five to 30 years at rates from 5 to 6.5 percent. Princeton's bonds, with 10- and 30-year maturities, sold at 4.95 and 5.7 percent, respectively. The lower rates mean Duke will have to pay its bondholders a lesser amount per dollar than its peer universities.

"We just happened to hit the market a little better than they did," Trask said. "Interest rates came down a little bit by the time we got out. We deliberately did it in the last 10 days of January because that's a period when a lot of corporations who have filed aren't in the market because they're being reviewed, so it's sort of an opening."

In a report, S&P analyst Marc Savaria indicated that the rating was based upon Duke's large application pool, high five-year graduation rate and high freshman-to-sophomore retention rate.

Duke compares favorably with most universities in these areas. But its smaller endowment as compared to Harvard and Princeton likely contributed to Duke's slightly lower credit rating, S&P spokesperson Ed Sweeney said. S&P also considers annual percentage endowment draw, debt load and fundraising in assigning credit ratings.

Although the University is expected to face budget cuts, Duke's bond issue may be as much a clever move as it is a crisis-management measure, said John Graham, D. Richard Mead, Jr. professor of finance at the Fuqua School of Business.

"My interpretation is that Duke was smart to obtain a half billion of relatively cheap debt in a time when credit markets are very tight," he wrote in an e-mail. "Obtaining a little extra liquidity right now, just in case things get much worse, is prudent because if things do get worse, there is a scenario where it might be hard for even credit-worthy institutions to have a hard time borrowing in the future.

Graham said bonds from institutions like universities are an attractive investment. Interest rates on Treasury notes, considered the safest investment available, are currently very low-between 1.48 and 1.85 percent for five-year notes and between 2.40 and 2.87 percent for 10-year notes during the period when Duke sold its bonds, according to the U.S. Treasury Web site.

"Four percent on a very safe Duke bond sounds very good compared to that," Graham said. "At the same time, 4 percent on a sure thing at Duke might also sound better... than the stock market to a lot of investors right now-this is called flight to quality and is a big influence right now."

Simultaneous with the $500 million issue, the North Carolina Capital Facilities Finance Agency sold $280 million in bonds for the University. Trask said these bonds were not for new projects, but simply to refinance earlier projects.

But although bonds are a useful tool in Duke's toolbox, Trask said he hopes to stay away from any issuances in the near future.

"Debt is a wonderful thing," he said. "It has one drawback, though-you have to pay it back. We have enough debt right now. I don't think we need any more."


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