Tue 30 Sep 2008
I worried about the College’s borrowing two years ago. The College had, at that time, $1.5 billion in the bank. Why would/should it borrow money (by selling bonds) rather than just spend some of the endowment? A commentator responded with:
Because Williams’ cost of equity is higher (i.e. return on the endowment) than its cost of debt. Especially if the interest paid is tax exempt.
Come on Kane, don’t you work in finance?
This is the logic of the condo-flipper in Fort Myers. As long as the endowment keeps on going up by more than the interest we pay on the bonds, Williams has a money machine! Why not just borrow $100 million and invest it in the endowment itself? We pay 3% in interest but make 10% in returns. Presto! The 7% spread means that Williams has made $7 million, and at no risk! Even better would be to borrow $1 billion and invest in the endowment. Then we make $70 million a year, enough extra to make tuition free for all!
The problem, obviously, is that endowment returns aren’t always positive, as folks with more than a year or two in finance realize. Leverage is a dangerous thing, for both hedge funds and small liberal arts colleges.
What impact has this sort of stuff had on our finances? I don’t know. Here is a listing of outstanding bonds and here are recent ones. Would all Williams debt be listed here? Is there an easy way to aggregate the total amount? Consider two bonds (the largest?):
Williams College $36,000,000 Bond Issue 01/04/2007
Williams College $71,160,000 Bond Issue 01/04/2007
How much interest does Williams pay on these bonds? If it is 3%, and the endowment lost 5% in the year through June 30, 2008, then this magical bit of financial engineering has cost the College $8 million. Well played, Collette Chilton!
Now, that is not fair. Williams was borrowing money long before Collette Chilton showed up. She almost certainly does not set policy on her own. The Trustees (along with the Investment Committee) sign off on any new debt. Yet the central fact remains that borrowing money when you have $1+ billion in the bank is a suspect exercise. In a bull market, leverage makes you look like a genius. In a bear market, it blows you up.
So, for starters, how about some transparency from the College? How large is Williams’ debt? What interest rate does it pay? What are the plans for reducing/increasing it?
It seems that, as of June 30, 2005, the College had $170 million in debt, at various interest rates. Has this debt been (partly) paid off via recent debt issues? Note that 2005 debt includes Series E through I. The two bond issues above are Series L and M. Looking again at the listing of outstanding debt, it looks like some of the previous debt was retired and some new added. Consider:
Williams College E 5/18/1993 22,000 13,800
Williams College G 6/29/1999 9,255 9,255
Williams College H 4/1/2003 42,850 39,630
Williams College J 4/3/2006 33,065 32,783
Williams College K 4/3/2006 39,700 39,700
Williams College M 1/7/2007 36,000 36,000
Williams College L 1/7/2007 71,160 71,160
We have the Series, the issue date, the issued amount and the amount outstanding (both in millions). Call it $240 million in debt. Assume the interest rate is 3%. (Is that reasonable?) Since the endowment lost 5% last year (and is almost certainly down again since June 30), we are looking at a $19 million loss.
Time to pay-off the debt or double down?
UPDATE II: Thanks to HWC for this link to the College’s financial statements.
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