The George Washington University will issue $300 million in new bonds to refinance existing debt and fund capital projects, including the construction of District House, the relocation of the Student Health Center and the University Counseling Center and the renovation of the Hall on Virginia Avenue.
Louis Katz, executive vice president and treasurer, talked to George Washington Today about the bond sale and how it will benefit the university.
Q: What does it mean to issue bonds?
A: Issuing bonds is a way to raise money. When a company or university issues bonds, it receives cash in exchange for a commitment to pay back the funds plus interest to investors. Universities around the country regularly issue bonds to refinance debt and fund capital projects. So far in 2014, more than 100 higher learning institutions have issued bonds, including Princeton University, Northeastern University and Stanford University.
Q: Why has the university decided to issue bonds now?
A: The time is right to issue bonds because interest rates are historically low and provides the university with the opportunity to refinance existing debt, saving money over time by paying less in interest. The university’s maturing debt has interest rates of 5.0 to 6.0 percent. With current market conditions, we expect to borrow at 3.5 to 4.75 percent, while extending maturities and improving loan terms.
In addition, the bond sale is part of the university’s ongoing effort to invest in improvements at the university. Funds from the bonds can be immediately invested in capital projects that are important to the university community, including the construction of the residence hall District House, the move of the University Counseling Center and Student Health Service to the Marvin Center, and the renovation of the Hall on Virginia Avenue. Furthermore, the strategic capital investments will be primarily self-supporting through revenue, including from residence halls.
While there will be a short-term increase in the university’s debt load, it will be reduced as debt is refinanced during the next two years. This bond sale is part of our overall financial strategy to refinance debt at lower interest rates and invest in capital projects that are important to the university. The university’s Board of Trustees supports this effort and believes it is smart financially.
Q: How is the university’s financial health?
A: The university is in solid financial health. Throughout this uncertain financial environment, GW has kept the institution steady by growing its endowment to nearly $1.5 billion, creating cost savings through efforts such as the Innovation Task Force and investing strategically to keep the university financially strong for years to come.
Q: Can the university pay for capital projects from its endowment, operating budget or philanthropic campaign instead?
A: Generally, the university’s strategy has been to use debt to fund capital projects, delivering new and enhanced facilities in support of the university’s academic and research missions. More than 70 percent of the university’s debt service payments are funded by specific revenue sources, ground lease payments from the Avenue, ending lease payments to external entities and parking revenues. Other universities with significantly higher endowments also take on debt to refinance debt or invest in capital projects.
Donations to the philanthropic campaign are used to fund long-term strategic initiatives for the university, such as expanding research capabilities or the Power & Promise Fund. The university has already raised $525 million during the quiet phase of the campaign, including the recent $80 million in gifts for the Milken Institute School of Public Health. Many universities have issued bonds in the middle of a fundraising campaign, including Boston University, Johns Hopkins University, New York University and Northeastern University.
Q: Will the university be raising tuition or fees to help pay for the increased debt load?
A: The university continues to be committed to its affordability strategy. The significant majority of capital projects are funded with debt that has a specific revenue-funding source. By using these market opportunities to issue new debt, we allow ourselves the ability to refinance more expensive debt while funding the new capital projects. This strategy lowers our overall weighted average cost of capital and continues to improve the cost efficiency of our capital funding model.
Q: Will any of the new debt be used to pay for the university’s agreement with the Corcoran?
A: No. First phase renovation funds for the Corcoran’s 17th Street building will come from the proceeds of the transaction. Any additional funds needed and the timing of renovations will be phased based on the resources available.