On Oct. 2, Todd Burson, vice president for finance, took advantage of current low interest rates and refinanced a portion of the College’s debt that was issued in the form of bonds in 2010.
Specifically, the College was able to lower its outstanding debt par value (the amount issuers promise to repay to investors) by approximately $7 million without using any of the College’s own money.
Burson finalized the refinance deal with support from the Board of Trustees. The deal was praised by both President Sean Decatur and Vice President for Student Affairs Meredith Harper Bonham ’92.
In total, the refinancing amounts to $12.9 million in present value savings, which means that the College will save $12.9 million over the life of the bond, as measured in the present value of the dollar. According to Burson, this will lower interest payments the College makes for the next 25 years.
The 2010 bonds are just one of five of the College’s current bond deals, the other four being the 2013, 2015, 2016 and 2017 issues. When the College issues bonds, it puts a 10-year call on them, meaning that they can recall the bonds in order to pay them off or refinance them after 10 years. This gives the College more flexibility to respond to market conditions, according to Burson.
The 2010 bonds will officially be called next April. The decision to refinance was a forward-delivery issue, with an agreement between the College and investors that they will close on the deal when the debt is called in 2020.
The reason why Burson and the Board of Trustees decided to pursue this forward-delivery issue is because of the favorable conditions for issuers in the current market.
The current global economy is characterized by uncertainty. Until recently, the yield curve on short-term bonds was inverted, a tell-tale sign of recession, and global economic growth is expected to be sluggish.
In times of uncertainty, investors flee towards safe decisions, such as investing in Kenyon’s debt on the municipal bond market. In basic economic terms, this meant that the College saw a lot of demand—and when demand rises, costs are driven down. Since last spring, Burson and the Board of Trustees’ Investment Committee have been watching the bond market and looking at the potential savings Kenyon could acquire through refinancing.
At the end of last school year, the College was looking at approximately $4 million in present value savings, the amount of cumulative savings of bond refinancing measured in terms of the current value of the dollar. In the summer, this increased to about $8 million.
“There was definitely a conversation especially around July … of ‘do we think those things are going to keep growing,’” Burson said. In seeking to answer this question, his job these past few months has primarily included reading the news and talking to underwriters.
“At the end of the day, it seems like it’s just going to keep getting better [for issuers],” Burson said, “The rates seem like they’re not going to skyrocket.” Thus, the decision became about choosing to strike a deal at the right time.
“The joke with the Board was, I said, ‘maybe we just make the decision when I stop sleeping at night, when there’s so much savings to be had that I start worrying about it,” Burson said.
Burson said that point came in late September, when rates jumped back up by about 40 basis points. Burson decided to pursue a deal with investors then and there.
Once the deal was finalized, the College had attained $12.9 million in present value savings, money that, as it trickles in, will free up financial resources which Burson said could be used to strengthen the College’s academic programs.
While the College comes away from the currently uncertain market with a much better deal and millions in savings, it is not solely a beneficiary of economic uncertainty. While the current interest rate environment is good for institutions that issue debt in the form of bonds, debt issuances are not the only way the College leverages its financial position.
“When something is benefiting your liabilities, it is likely that your assets are not doing as well,” Burson said. As such, he said the Board of Trustees and specifically the Investment Committee have concerns about returns over the next five to 10 years, indicating that global macroeconomic indicators point to more of the same as far as slow GDP growth in the near future.
Nevertheless, Burson said the Board is acting to “shield the College as best we can if those low investment returns come to fruition.” The decision to refinance bonds, thereby bolstering the liability side of the College’s accounting ledger, is one such step to prepare for a potential hit to assets.