Thursday, May 28, 2009

Should've Gone to Or not.

Here's a quotation from an article from yesterday's D regarding the drop in the College's credit rating and the cost it incurs:

Days before the College plans to issue over $400 million in bonds, Standard & Poor’s downgraded the College’s credit rating to double-A plus, the second highest rating, from its prior triple-A status. The change will likely have only a marginal effect on the College’s upcoming bond issue, according to Adam Keller, Dartmouth executive vice president for finance and administration.

Because of the downgrade, Dartmouth will incur “a very modest cost” — interest rates will increase between one and two-tenths of one percent on the new bonds, Keller said in an interview with The Dartmouth.

That doesn't sound too bad, does it? The College took some risks, gets its credit rating lowered, but it'll shrug it off, right?

Let's crunch some numbers here. 0.1-0.2% on those loans means that the that the College will pay out about $400,000-$800,000/year of extra interest on the $400,000,000 loan - in other
words, the annual cost of 3-6 full professors. Unless your name is Tim Geithner or Henry Paulson, it's hard to call that amount of money "modest."

In contrast, those flat-screen TVs in Collis and FoCo that are a favorite target of editorials in the D are probably cost $3,000-5000 each. I'm not sure what model they are, but a quick trip to Best Buy's website seemed to give a price range for the big screen models at around $2,000-3000, even though they were on sale. If there was something that students should be upset about, TVs in Collis and FoCo ought to be a bit lower on their list.


Anonymous said...


TwentySix said...

Given the fact that they're 30 year bonds, the cost is considerably more than just an additional .1% per year. Compound it annually...

Pirate Hat Guitar Guy said...

The college says it needs the money "now", but in the same breath says it is a contingency for future investment.

This can only mean that there is insufficient liquid cash in the endowment's existing investment pools. Sounds like an allocation imbalance.

OR the money is being spent on buildings and operations... is the budget being balanced or not? Speaking of "human assets" to justify spending sounds a bit like companies using "goodwill" to improve their balance sheet.

And while we are on finance, how go the budget cuts?

"The department will implement several measures to save funding, which includes relying on a less expensive company to cater department events, he said."

Indian Finance said...

I think you all are missing the point. Dartmouth will be getting $250 million at a very low cost of capital by historical standards. Fed rates + TED spreads are at record lows.

If the CIO and the investment committee thinks that interest rates are likely to go up over the next few years or so, which I'm sure they do, then they'll take an interest rate below 6% any day of the week. Considering that their endowment on 30 year horizon should have an IRR well above 6% (it certainly has historically over those kind of timeframes), then the economic returns from the spread is significant.

In addition, the don't have to sell out of illiquid PE and RE investments at distressed prices. It's really a no brainer from a fiscal standpoint.

All of the top institutions have made a similar assessment and gone down the same path. The credit rating downgrade to AA+ is immaterial, and is appropriate given Dartmouth's overall risk profile (extremely low but not UST low...) Finally rating agencies seem to be taking their seriously.

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