University Issues Millions in Bonds for Campus Construction

The University of Vermont recently announced plans to issue $163 million in bonds. This is not the first time UVM has undergone significant debt financing, other series of bonds were issued in 1998 and 2002. These bonds will be the primary source of capital for funding recent and ongoing construction projects on campus.

When a bond is issued, the price you pay is known as its “face value.” The issuer promises to pay you back on a particular day — the “maturity date” — at a predetermined rate of interest — the “coupon.”

If you buy a bond with a $1,000 face value, a 5% coupon and a 10-year maturity, you would collect interest payments totaling $50 in each of those 10 years. When the decade was up, you’d get back your initial $1,000.

A key difference between stocks and bonds is that stocks make no promises about dividends or returns. A company is under no obligation to compensate you if the value of their stock decreases. When a company issues a bond, however, the company guarantees to pay back your principal (the face value) plus interest.

If you buy the bond and hold it to maturity, you know exactly how much you’re going to get back. That’s why bonds are also known as “fixed-income” investments, they assure you of a steady payout or yearly income.

“This is a great time to issue bonds, because the interest rates are historically low and prices are historically high,” said Michael Gower, Vice President of Finance and Administration. “This is the first of several issuances the university plans to release over the next 10 to 12 years.” The university trustees, a series of investment bankers and UVM’s debt advisors, have discussed the 2005 bonds since last spring.

The Strategic Financial Plan that Gower refers to started in the winter/spring season of 2004, entailing cost projections in bringing President Fogel’s Strategic Vision to fruition: to invest and grow. It covers permanent financing and projects that have recently begun. Some of these include the Dudley Davis Center, the University Heights project, and classroom and residence hall renovations and improvements.

UVM is not in a position to perform equity financing, or “fundraising” to complete the aforementioned projects. It would simply take too much time and energy.

Further, our current equity goes towards UVM’s endowment, which focuses largely on financial aid. And we receive approximately $2 million a year from the state government. Consequently, when undergoing capital-intensive projects like our recent construction and renovation projects, UVM can capitalize on its non-for-profit status and issue attractive, tax-exempt debt.

This signifies that bondholder won’t pay taxes on the profits earned from holding their security. UVM currently has between $300 and $350 million dollars in outstanding bonds, figures that pale in comparison to the approximate $1 billion dollars that Colombia University maintains.

UBS and Citigroup are the underwriting investment banks involved in the 2005 bonds. Both banks won out in the competitive bid UVM brought to the market.

Gower notes that Vermont maintains a unique investment environment for non-for-profit bonds because a significant percentage of the bonds are purchased in the retail market; i.e. individual investors from Vermont generate higher demand for UVM bonds than other state universities’ see from their local residents.

The remaining bonds will be purchased in the institutional market, by a series of mutual fund companies, bond fund companies, and corporate big buyers.