The Massachusetts Institute of Technology this week borrowed $750-million by issuing taxable bonds that it plans to repay not over 30 years, the usual term for capital borrowing by universities, but over 100 years.
Bankers and officials at Moody's Investors Service said the MIT "century bond" deal, which would be rare even for blue-chip businesses like the Coca-Cola Company, could herald similar transactions by other universities, although as a Moody's analyst noted, only "market-leading institutions with global reputations" are likely to be able to command the favorable financial terms that make such deals attractive.
"It will be an option, but it's not something that we think will be an option for the general sector," said Karen Kedem, a vice president and senior analyst for the higher-education and nonprofit group at Moody's.
MIT will pay an interest rate of 5.62 percent on the bonds. According to bankers who work with universities, had MIT issued 30-year debt, it would have paid about 5 percent in a taxable issue and about 4.5 percent in a tax-exempt one.
In a written statement, MIT said the deal would allow it to lock in "a historically low cost of capital for a very long period of time, while at the same time providing an effective hedge against inflation." MIT plans to use the proceeds to finance projects in its MIT 2030 plan, which calls for renovations and for several construction projects, including a new energy and environmental-studies building, a performing-arts center, and a nanotechnology fabrication center.
Although institutions that borrow by issuing taxable debt often have to pay higher interest rates than they do on tax-exempt bonds (investors accept lower rates in return for the tax benefits), the taxable bonds allow the issuers far more flexibility. Proceeds from taxable bonds, for example, can be used for facilities that might house a private business. Universities also face fewer restrictions on how they invest the proceeds from taxable bonds than with the proceeds from a tax-exempt bond issue.
Because of those advantages, and because interest rates for taxable bonds have been relatively low, a growing number of institutions have recently been looking at taxable bonds as a way to raise capital. The success of the MIT deal—a banker familiar with the transaction said the depth of the demand at that interest rate was surprisingly strong—might fuel more interest in the use of century bonds by other universities, particularly those that are treating debt, like their endowment investments, as a permanent part of their capital structure and financial-management plans.
While century bonds are uncommon, MIT is not the first university to issue them. Both Yale and Boston Universities did so in the mid-1990s, although for deals about one-seventh the size of MIT's. As investments, 100-year bonds are attractive to buyers like pension funds and life-insurance companies, which have long-term liabilities and need to match them with long-term assets.
