UNIVERSITY PARK, Pa. – In early June, the University secured an extremely favorable interest rate in the sale of its $351.9 million (par value) public bonds, as part of its financing of several building projects on multiple campuses.
Penn State, like other universities such as Harvard and Cornell, raises money by issuing bonds to institutional investors and retail buyers. Highly regulated and low risk, university bonds are an ideal investment opportunity. They also allow universities to raise large amounts of capital over a long period of time and at a low, fixed cost.
Projects being financed by the bond sale include construction of the Agricultural Engineering Building on the University Park campus; new housing at the Abington and Brandywine campuses; the student union building at the Brandywine campus; a new residence hall in East Halls, renovation of residence halls in East, and the new residence hall in North Halls, all on the University Park campus.
The University secured an all-in interest cost of 2.74 percent in the sale of its Series 2016 bonds. Additionally, the transaction yielded $35.9 million of net present value savings over the life of the refunded bonds, constituting 13.89 percent of the refunded amount -- as compared to a typical market threshold of 3-4 percent expected savings for most institutions.
“This is the best bond sale outcome I’ve witnessed in the 30 years I’ve been engaging in these activities,” said David Gray, senior vice president for Finance & Business/Treasurer. “On the day of the transaction, the long-term bond market hit an all-time intra-day low, resulting in a very favorable all-in interest cost of 2.74 percent.”
Because the bonds were over-subscribed by the market by approximately five times, the University was able to negotiate additional savings as part of the refinancing. “This is a challenging period for investors and we were fortunate to attract some very notable institutional buyers on the bond," said Gray.
This bond issue is split between $122.1 million of new debt and $229.8 million of debt to refund the University's Series 2007A, 2008A and 2009A bonds. Gray noted that the average life of 12.35 years for the bonds is due to the significant refunding component of the transaction. The new money component of the bonds has a 25-year final maturity.