Penn sells first ever 100-year bond
The bond will help fund building improvements as part of the Climate Action Plan
April 5, 2012, 11:03 pm·
In an unprecedented sale, Penn has issued its first-ever century bond as part of an effort to further campus-wide sustainability goals.
After the Board of Trustees approved the 100-year bond sale late last month, Penn sold the bond for $300 million at a yield rate of 4.7 percent — the lowest interest rate ever issued for either universities or corporations, according to The Wall Street Journal.
These funds will be used to modernize aging buildings on campus as part of the Climate Action Plan. Specifically, the proceeds from the bond sale will fund new heating, lighting and cooling systems in older buildings and student housing in order to generate cost savings and make the University more modern and efficient, University Treasurer Stephen Golding said.
When Penn’s 100-year bond — which functions like a loan — matures in 2112, the University will have to pay back $300 million plus interest.
University Treasurer Stephen Golding explained that, with the onset of the financial crisis, prominent universities with large endowments faced difficulties in generating cash to fund their operations.
As a result, last year, universities like the Massachusetts Institute of Technology entered the long-term bond market, issuing 100-year bonds to “secure funding without having to worry about paying off the bonds for a long time,” he said.
“There are very few companies or organizations that investors care to invest in with the expectation that they’ll be around for 100 years,” he added. At high-end universities, however, “there’s quite a bit of confidence in the investor market that [universities] will be around, so they are willing to invest in their bonds.”
About a year and a half ago, after evaluating Penn’s financial performance and debt capacity, the Treasurer’s Office decided to take advantage of the unusually low current interest and yield rates for bonds, Golding said. These rates will allow Penn to pay small amounts of interest every year compared to future predicted market interest rates.
“A 100-year bond is a very unique thing … there is always a very limited market” since it is issued by so few institutions, Wharton finance professor Krista Schwarz said. “This is a very attractive time to be issuing a long-dated security.”
Several other peer institutions have recently taken advantage of these conditions. According to a March 29 article in the WSJ, the University of California system sold $860 million in century bonds in February. MIT, University of Southern California and the California Institute of Technology sold 100-year bonds in 2011 as well. Century bonds are primarily bought by mutual funds in the United States.
Penn expects work on the projects that will receive funds from the bond sale to be completed over the next three to five years.
“We want to take advantage of this opportunity and be able to get as many of these projects started as we can,” he said.