University Treasury Refunded $220M Bond to Advance Rutgers’ Mission
In 2019, market interest rates were at historic lows and University Treasury’s focus on securing more favorable interest rates for Rutgers’ outstanding bonds was high. The department would refund more than $600 million in outstanding bonds that year, allowing the university to lower its weighted average cost of capital. It’s a move that Adam J. Day, associate vice president and associate treasurer, likens to refinancing a mortgage.
“If you have a mortgage of five percent over 30 years and you can get a new mortgage at three percent over 30 years, then every month you’re saving that difference. Refunding bonds is very similar to refinancing; you’re saving money over time,” Day said.
By refunding $600 million-plus in bonds held by Rutgers that year, Day; Jeffrey A. Manolo, director of debt management and capital finance; and debt management associate Crystal H. Lee, who worked in concert to execute the bond deal, demonstrated the savvy financial stewardship for which their department is recognized—but their efforts wouldn’t stop there.
Though the more than $600 million in refunded bonds was staggering, it excluded one key component: a portion of the bonds issued in 2013 for the College Avenue redevelopment project that resulted in a new academic building, a residential Honors College, new buildings for the Rutgers Hillel and New Brunswick Theological Seminary, as well as student apartments, stores, and a campus green. Rutgers students, staff, faculty, and alumni alike know the latter area as the Yard, speckled with brightly hued lawn chairs, a handful of eateries, and an HD jumbotron that broadcasts content ranging from Rutgers sporting events to movies.
The redevelopment was a complex project, and its complicated nature required the bond’s refunding to be handled separately. “It was a unique structure involving tax credits from the New Jersey Economic Development Authority [EDA], and a lease financing structure with Devco, the real estate developer,” Day said. “For this reason, we needed more time.”
Day, Manolo, and Lee didn’t need to roll up their sleeves; they’d already been diligently driving bond refunding to bolster Rutgers’ long-term financial savings, and this is precisely what they would continue to do until they were ready to go to market with the remaining 2013 bonds. But as with all stories worth telling, they wouldn’t do so without facing a challenge.
“Around February [of 2020], we were getting ready to go,” Day said, “and then, COVID-19 started to become more widespread globally.”
Amid the early evolution of the COVID-19 pandemic, the debt markets ground to a halt and interest rates spiked.
“At that time, the potential savings evaporated so we had no choice but to put it on hold and wait and see what would happen,” Day said.
Though the market would stabilize some in March, interest rates remained relatively high. This pattern would break in the summer, and the University Treasury team, which had been watching, awaiting this shift, would agilely work to restart the refunding. Their resolve would pay off.
“We priced [the bond] in August and got an all-in interest rate of 2.49 percent. We saved about $42 million on a net present value basis, which was about 22 percent of the par amount of the bonds, so it was a really excellent result,” Day said.
To proactively address cashflow challenges presented by the unprecedented COVID-19 circumstances, Day, Manolo, and Lee intentionally structured the refunding bonds to allow Rutgers to receive as much of the savings in the early years as it could. “Rather than saving a level amount each year that the new bonds are outstanding, we tried to frontload the savings by adjusting the amortization schedule to save almost $6 million in 2021, then just over $4 million in the next 5 years, and then down to $1.2 million per year through 2046. We wanted to get as much of the cashflow savings upfront as possible,” Day explained.
Day considers the refunding of the bonds associated with the College Avenue redevelopment to be an illustration of the usefulness of the university’s internal bank structure.
Rutgers established its internal bank in 2016 in a strategic move that would disassociate external borrowing from internal projects. Prior to the institution of the internal bank, funds supporting university projects were borrowed from external sources specifically for the given project. With the advent of its internal bank, Rutgers gained the ability to borrow based on its overall capital plan and lend internally at a blended rate, allowing the university to proactively manage its total debt portfolio and—perhaps most importantly—take advantage of changes in interest rates.
“This was a testament to our ability to capitalize on favorable market conditions when they present and to minimize our overall cost of borrowing to help support the university’s mission,” Day concluded.
Learn more about University Treasury’s financial stewardship.