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Risk and Reward

October 18, 2012

The University of Cambridge's £350 million ($566 million) bond issue, intended to help finance a major housing and research development, has prompted concern about the potential impact on the institution of a decline in the property market.

Cambridge has raised the money by selling a 40-year bond to investors, mainly pension funds, to be repaid at a fixed interest rate of 3.75 percent. The favorable terms are due to the university's securing a credit rating of AAA with stable outlook -- higher than that awarded to the British government. The bond will finance capital projects, including 1,500 homes for university and college staff, 1,500 homes for sale, accommodation for 2,000 students and new research facilities.

Leszek Borysiewicz, Cambridge's vice-chancellor, told the university's Regent House, its governing body, that the effort would be "the biggest capital project that this university has ever contemplated -- indeed, I find it difficult to think of anything comparable in British higher education."

Ross Anderson, professor of security engineering at Cambridge, was the sole member of the institution's council to dissent from the original decision to seek external financing for the project. He said that the proposal "was a child of the now-vanished property boom. I took the view that we'd be better off keeping the land, as the basis for [the] development of new departments and institutes" over the next 50 years.

Gillian Evans, emeritus professor of medieval theology and intellectual history at Cambridge, said on the university's governance newsgroup: "I can't help casting a mental eye back over confident assumptions on property values during the past few decades. What happens if the university is left exposed on this gigantic scale should it all go wrong?"

The university's "green paper" on the project, published in June 2010, outlined eight potential problems as part of a risk analysis. Heading the list was: "Uncertainty in financial out-turn caused by changes in land values and building costs."
Cambridge follows De Montfort University in issuing a public bond this year, with more universities expected to follow suit as public capital funding and long-term bank finance grow more scarce.

Chris Hearn, head of education at Barclays, which managed De Montfort's bond issue, said moves into the bond market by two very different types of institution showed that "this type of finance is going to be key for all universities."

Charlotte Weir, a director in the British debt capital markets team at Barclays, said that Cambridge's high rating was attributable in part to its large endowments and ownership of profitable businesses. Cambridge's bond issue had been "four times oversubscribed" by potential investors, she added. Weir said that many investors saw higher education institutions as akin to housing associations, which have moved into the bond market, in that they benefit from "implicit government support and a degree of regulation."

 

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