From hwc:

Thanks Ronit for the heads up.

Williams College is selling two bond issues this week, totaling $93 million.

A $50 million fixed rate bond issue (new debt) is being used to partially finance the library. Moody’s notes that additional debt for the library is planned for 2013.

A $43 million variable rate bond issue will refinance two existing bonds (from 1998 and 2007, I think).

Moody’s reaffirms the Aa1 bond rating with a stable outlook. This brings Williams debt to $305 million. The bond prospectus is not yet available at the muni securities site. I’ll keep checking. These usually show up pretty quickly.

0) Background reading.

1) A Bloomberg writer is interested in some non-Administration views on this topic. What do you think? Tell us in the comments. Links to the actual documents would be much appreciated. Perhaps someone could ask Jim Kolesar to post the prospectii . . .

2) My opinions are unchanged. From 2006:

Why does the College, with its $1.5 billion endowment, need to sell bonds? What interest rate does it pay on these bonds? What sort of fees does Morgan Stanley generate from the deal?

“Neither a borrower or a lender be” was good advice in 2006. It is good advice today.

From 2008:

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.

More detail:

Despite 25 years of excellent returns, it was deeply suspect of Williams (or any college) to assume that it could make 8% returns (or 5% real returns after inflation) forever. After all, world GDP growth is definitely lower than 5%, probably closer to 3%. If world GDP grows at 3% and the Williams endowment grows at 5%, then, with mathematical certitude, Williams will eventually own the entire world. Since that outcome seems unlikely, one of our assumptions is false. It may not have been obviously stupid for the folks that run Williams to borrow hundreds of millions of dollars in 2006. Who knows? In some alternate universe, it might have worked out! But it was stupid (it is still stupid!) to assume, for planning purposes, that the Williams endowment could, over the long term, grow at 5% in real terms. That is impossible.

The lesson? Make sure that your assumptions about the world have some connection to reality. Don’t assume 5% real returns just because everyone else assumes that. Note the psychological bias in favor of such pleasant assumptions. The higher the EXPECTED return, the more money that we can spend now!

Should Williams learn from this mistake and pay off the debt now? I don’t know.

In 2008/2009, it was reasonable for Williams to keep its debt steady in order to avoid liquidating equities and equity-like positions (real estate, buyout funds, et cetera) at the bottom. Well done! But markets have rebounded dramatically in two years. (Yes, my Wolf warning was made at the bottom.)

Regardless, Williams should not be issuing more debt. Instead, we should be paying off some of the debt that we have now. Odds of that happening? Zero. The trustees believe that they can borrow money at 3% (or whatever) and invest it at 5%. Forever. What could possibly go wrong?

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