Wed 19 Nov 2008
Below is an article from March 2003 on the College’s borrowing $100 million, thereby losing its triple-A rating. Prior to 2003, the College had much less debt. Going back to the 2000 Form 990 (pdf), we see that Williams had only (page 74) $78 million in debt. That is why it had a triple-A credit rating.
When Morty arrived, Williams had a leverage ratio of around 6% ($78 million of debt on a $1.4 billion endowment) on June 30, 2000. Under Morty’s leadership, Williams more than doubled its leverage, hitting 15% on June 30, 2008 ($262 million of debt on a $1.8 billion endowment). How is that working out for us? About the same as it did for all those condo-flippers in Ft. Myers.
Although the math is a little tricky, Morty’s (?) decision to increase the College’s leverage has cost Williams at least $50 million dollars. If we had kept our debt at $78 million (or let it rise in dollar terms but no higher than 6% of the endowment), Williams would be more than $50 million richer. This was the most costly mistake made at Williams in the last decade. Why won’t the Record report on it?
Williams College lost a coveted triple-A rating after being downgraded to Aa1 by Moody’s Investors Service yesterday, a move prompted by the upcoming sale of $113 million in debt next week by the liberal arts college, which is located in Williamstown, Mass.
The private college is selling $43 million in Series 2003H revenue bonds and $70 million in Series 2003I variable-rate revenue bonds on Wednesday. Of the Series H bonds, $13 million will be used for refunding. The remaining $100 million in Series H and I will be new money.
“We believe that Williams remains a fundamentally strong credit, but the current offering increases its debt burden to a point where it is no longer in the premier Aaa category,” said Moody’s analyst Gabriel Topor.
The funds from the sale will be used to finance the construction of several new buildings on campus, including a performing arts center, student union, faculty housing, and power plant. The bonds will be secured by the college’s general obligation pledge and are being underwritten by Morgan Stanley.
The school’s debt will rise by $100 million following the current transaction, which, combined with two straight years of investment losses, has significantly affected the college’s balance sheet.
The national economic downturn has caused disappointing investment returns on the school’s endowment, which is also contributing to the weakening balance sheet. However, fund-raising remains strong and is expected to play a pivotal role in helping the college to weather the dismal economic environment.
Christopher Wolf, manager of investments and treasury operations for Williams, said the college knew long before approaching Moody’s that this level of debt would place them in the high to median range for a Aa1 rating.
“The bottom line is we think this is the right debt-financing plan for the college and we don’t want the rating to be the deciding factor in financing our capital plan and locking in some extremely low rates,” Wolf said.
He also said that though school officials had looked into the possibility, entering into a swap with the variable-rate bonds is unlikely since Williams is generally fairly conservative in managing its debt.
Williams’ outstanding market position puts the new rating at stable, according to Moody’s. The college has a selectivity ratio of 22% and enrollment is likely to remain constant at slightly over 2,000 students, which college officials consider ideal.
Standard & Poors rates the college AA-plus. Fitch does not maintain a rating.
November 19th, 2008 at 8:00 am
How does it compare to what “typical” money managers have done over the relevant period?
November 19th, 2008 at 9:07 am
“When Morty arrived, Williams had a leverage ratio of around 6% ($78 million of debt on a $1.4 billion endowment) on June 30, 2000. Under Morty’s leadership, Williams more than doubled its leverage…”
“Although the math is a little tricky, Morty’s (?) decision to increase the College’s leverage has cost Williams at least $50 million dollars…”
I could be wrong, but if this post was intended in part to surface criticisms of President Schapiro, I doubt it will succeed. He seems to have an extremely high approval rating and something of a Teflon coating.
I don’t know the man and I don’t have much of a sense for him. I think that critical analytical scrutiny of his actions gets suspended sometimes because he is touted as being an expert in the areas where higher education and economics meet and because he obviously has quite a magnetic personality. I guess I feel rather neutral about him, all in all — that clearly puts me very much in the minority.
I hope Schapiro will be able to use his magnetism to get the various constituencies behind a workable plan to put Williams back in a stronger financial position, and to get donors to open their pockets. (If so, my approval rating of him will soar.)
November 19th, 2008 at 9:19 am
“The funds from the sale will be used to finance the construction of several new buildings on campus, including a performing arts center, student union, faculty housing, and power plant. ”
So that’s the refunding for those projects. I wonder when the refunding for the New Academic Buildings/Library project comes up, as I’m sure bonds were used there. And how much of a shortfall there is on the library still.
Does anyone know what the non-refunding portion of the issuance is to be used for?
Hard to remember that not so long ago we had a capital campaign that significantly exceeded its initial reach.
November 19th, 2008 at 9:45 am
1) Not a criticism of Schapiro, per se, more an observation. Odds are, it was not only Morty’s decision to increase leverage. I bet that the Investment Committee and the Trustees went along. (Morty is too smart not to get their buy in.) Moreover, increasing debt was a common strategy among elite schools. For all I know, Williams did this less than other colleges.
I just find this topic an interesting one because a) It was the costliest mistake in dollar terms this decade and b) It is a great example of how all the best and brightest can be very wrong, even when (especially when) they all agree with each other.
2) I don’t have the data to determine how Williams endowment performance over the last decade compares with that of similar institutions. It does not make a lot of sense to compare Williams with typical money managers (mutual funds?). If the Record wants to investigate this, I can point them in the correct direction. My sense is that, through June 2008, Williams has done fine.
3) With regard to the “non-refunding portion of the issuance,” I am not sure that this is a sensible question. (Do we have any expects in private college bond issuance?) My sense is that Williams is not allowed to borrow money unless it can point to specific construction projects planned or underway. However, once it can, there is no need to tie the specific bond to the project. You could borrow $100 million, build your building (spending, perhaps, much less than $100 million), and then keep the $100 million in debt for a decade or more. After all, has the College really done $200 million in building in the last 5 years, even including the unfinished Weston and Sawyer projects? Not that I can see.
November 19th, 2008 at 12:08 pm
What distinguishes the investmemt objectives of an appropriate mutual fund(s) from those of the College so that a comparison of performances does not make sense?
November 19th, 2008 at 12:09 pm
I’m glad you took the time to write Comment 4, DK. It was good to know why you made the post. I agree that the Trustees and other important constituencies must have been party to the leveraging up.
Re your point #3:
I agree that funds are fungible, of course (although I hadn’t realized that those bond proceeds weren’t required to be applied to the specific projects — live and learn, I guess.
Your answers start to surface some of the information I was hoping to see. How much do we suppose went into construction — and was the rest going into operating expenditures or into a set-aside to fund the other phases of the capital projects (and if a set-aside, how much has its value dropped? or am I just ignoring a lack of designation that fungibility produces?).
I am interested in learning more about what the most recent/in the hopper projects (mainly the academic buildings and the library, which I guess would include the storage facility and the moving and redoing of Kellogg and any other of the smaller buildings that are impacted, but also the athletic facilities renovation), and how they have been/will be funded. I wonder, too, how the (unexpected) repair and major renovation of Goodrich Hall were funded/are being funded. Anyone know anything about these areas?
There’s “give” on the operating budget but debt can be such a large millstone if. I’m beginning to wonder if there’s something there that may blow up, and whether it is realistic to think that the library and other projects will be able to go through sometime in the next few years.
November 19th, 2008 at 12:16 pm
Actually, it could very well be that they’ve done/are planning over $200 million in construction. The athletic facilities/Weston project has a $107 million price tag, if I remember correctly — I am in favor of many of the components of that project but I had my socks knocked off when I saw the projected cost.
November 19th, 2008 at 12:23 pm
Apologies for the typos above. I hope the meaning can be deciphered. I’ll try harder at proofing.
Frank’s questions interest me,too.
November 19th, 2008 at 1:40 pm
The “refunding” question is more a matter of designating various buckets of debt. For example, bonds are issued for building Paresky. Those bonds are subsequently retired and replaced with a new bond issue at more attractive terms (maybe fixed instead of variable, whatever). No matter how many times that debt is refinanced, it will always be known as the “Paresky” bucket in the notes to the annual report. For whatever reason, college debt is always tied to particular projects.
BTW, I can only find the following colleges that have Moody’s highest Aaa bond rating:
Pomona College
Amherst College
Swarthmore College
Grinnell College
Berea College
Williams and Claremont McKenna both have the next highest rating AA1. It’s possible I missed a couple more at this rating level.
Swarthmore was upgraded in 2006. I think Wellesley was just upgraded this year.
Here’s one for DKane: The most detailed statement of college debt policy I’ve seen:
Berea College Debt Policy (PDF)
And another little tidbit I stumbled across. With all the talk of economic hardship, a college to keep an eye on as a candidate for extiction is right up the road in Bennington. Moody’s has had their bond rating below investment grade since the mid-1990s when Bennington almost went out of business, firing a third of its faculty. It’s enrollment has bounced back, but it is currently spending $35,000+ per student per year with essentially zero endowment. With under 700 undergrads, they have no margin for declining enrollment. As you might expect, I’m not having much luck finding their annual financial reports on their website.
November 19th, 2008 at 1:50 pm
I strongly maintain that Williams College is as solid financially as any college in the United States.
With that in mind, if there is “something there that might blow up”, it is probably the fact that virtually all of the bond issue debt is variable rate.
I’m not a bond expert, so I won’t even hazard a guess about the implications of that. I do know that in a news article following the market collapse in October, Swarthmore’s VP Finance expressed her relief at the fact the college had just finished converting its last variable rate bond issues to fixed rate back in April. My sense was that variable rate is not a good place to be right now. I think it is subject to being “called”, forcing refinancing at horrendous rates.
November 19th, 2008 at 2:07 pm
I believe the budget for Weston Field is $17 million.
November 19th, 2008 at 2:17 pm
1) Frank writes:
First, most mutual funds have restricted universes. They can only invest in US stocks or bonds or whatever. Institutional investors (endowments, pension funds) can invest in anything.
Second, mutual funds need to provide daily pricing (so that you can buy and sell your shares each day) so, for the most part, they are restricted to things that trade every day so that there is a (good) price to value holdings at. Institutional investors don’t need daily pricing so they are free to invest in things like private equity and hedge funds that don’t provide daily pricing.
Third, in conjunction with pricing, mutual funds need to be liquid so that you can get money out anytime. Williams can invest in illiquid deals that lock up the money for months and years.
Fourth, Williams has an investment horizon that is, more or less, infinite. So, it can invest in things that may be very volatile year-to-year but that, over the long term (one hopes!) does well. (This is one way in which endowments are different than pension funds since the latter have somewhat clear schedules over what they need to pay out when. They have (at least for the current set of workers) a clear end date.
But it is still possible to measure how well Williams is doing by comparing it to similar endowments. I have not looked closely at this topic, but I believe that Williams has done fine. More details in a later post.
Thanks to HWC for the excellent Berea link. I agree that Williams is in as solid a financial position as almost any other school. But there were a lot of condo owners in Miami 2 years ago who thought that, however much in trouble that other condo owner was, they were fine . . .
November 19th, 2008 at 3:07 pm
Berea is quite an interesting school. They have a per student endowment larger than Wellesley’s or Dartmouth’s, almost as large as Williams’.
They only accept low income students, primarily from the surrounding Appalachian region and they charge no tuition.
November 19th, 2008 at 4:18 pm
Thank goodness. Then there was a typo in what I had read about the Weston work. Still, I guess $100 million of construction, taking all those projects into account, wouldn’t be too hard to believe.
November 19th, 2008 at 4:21 pm
That’s just the kind of “bomb” I am thinking about.
November 19th, 2008 at 6:16 pm
One of the problems with running a modern college endowment is that not only is the time horizon infinite but so is the mission. There will always be desire for ever increasing amounts of money. More buildings, higher pay, smaller classes, more financial aid, overseas expansion, all good causes. When the endowment got to 1.9 billion, in hindsight, you could have annuitized the annual expenditures. A conservative 10% a year would kick off $190 million. If the school is always going to be around 2000 students then $190 million a year plus any other dollars taken in would be enough to last forever (ignoring inflation which you can hedge). That’s how you endow most things. Like the speech by Albert Brooks in Lost in America, you never risk the nest egg. In keeping with the immortal Wall Street plea which is being offered on high at most colleges, Dear God please let me get back to even and I promise never to do it again. Maybe next time it gets close to 2 billion they will do it differently.
November 19th, 2008 at 6:28 pm
David, then if your exposition is the sum of it, Williams has nothing but investment advantages over mutual funds. Consequently how has Williams done relative to an appropriate fund(s)? It should have done significantly better.