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Western EuropeJune 1 2015

Oxford college breaks new ground with bond issuance

University College, one of oldest colleges at Oxford University, has taken advantage of the near-zero rate environment to issue the lowest yielding university bond ever recorded.
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Oxford college breaks new ground with bond issuance

University College is widely considered to be the oldest college in Oxford University, founded in the 13th century and attended by such luminaries as scientist Stephen Hawking, poet Percy Shelley and former US president Bill Clinton. It recently made history of a different kind, when it launched a £40m ($62.9m), 50-year bond with a coupon of just 3.1%, the lowest yielding university bond on record. 

“We found the low level of rates compelling. It seemed like an exceptional opportunity, which would probably not recur. So we thought that if we were going to do it at all, then now would be the time,” says Frank Marshall, the estates bursar at the college.

University College traditionally funds itself through a £130m endowment fund, managed by an investment committee, which includes several former alumni. “The objectives set for the investment committee are to finance college spending at a reasonable rate, taken to be on average a 4% drawdown from the endowment, and to cover the effects of inflation on income and capital. If possible, we also aim to make additional returns to finance capital spending on the premises, though of course that isn’t always possible,” says Mr Marshall. 

To meet these objectives, University College generally invests in long-term assets with comparatively low volatility. However, in today’s low-interest-rate environment, even 4% is deemed an overly ambitious target. “At the moment, we are targeting 3% to 3.5%, so we are going through a period of more constrained expenditure because income is more constrained,” explains Mr Marshall.

Doing the research

Against this backdrop, the opportunity to raise long-term capital at a fixed low cost seemed an avenue worth exploring, especially after former members of the college – now working in finance – raised the possibility. “We were encouraged by old members to start thinking about the bond market about a year ago but we only actively began considering it last December, when rates came down quite sharply,” says Mr Marshall.

As an institution with a reasonably sized endowment, University College discussed investment options with several asset managers, including Credit Suisse. “Our investment contact there introduced us to his colleague on the private placement desk. We do regular investment business with the bank and, as with other people we deal with, we take the trouble to make sure they have a wider background of the college finances so they can offer advice on a slightly broader front,” says Mr Marshall. 

Having met the Credit Suisse syndicate team, the next step was to find out more about the likely terms for an Oxford college that was unrated but had a sound financial track record and a history stretching back more than 700 years. “We went out with Credit Suisse to test the market. It gave us a very clear account of the terms we could expect and how it would distribute the paper. The terms sounded good, compared to other conversations that we had had and the detail and clarity with which Julie Edinburgh, the Credit Suisse private placement head, spoke gave us the confidence that it could be done,” says Mr Marshall.

A private placement seemed the most appropriate choice, given the size of the bond. “We were advised that a private placement could obtain comparable terms to universities’ public bond issues and that it would be the best route open to us,” says Mr Marshall. Lawyers were drafted in next, Allen & Overy for Credit Suisse and Clifford Chance and Farrer & Co – which specialise in charity law – for University College. “The legal teams made a big difference to us. They all worked really constructively and efficiently together. Undoubtedly, the prospectus for a debut issuer is hard work but all the other aspects of the process were done very smoothly,” says Mr Marshall. 

Top marks

Achieving a 3.1% coupon on a 50-year bond is no mean feat for any issuer. But for an unrated inaugural transaction, the terms are particularly noteworthy. “We didn’t have a rating but Credit Suisse described the paper as ‘investment grade’ and this was substantiated in the prospectus,” says Mr Marshall.

The bond was duly sold to a single institution at the very end of April, ahead of which University College had just one main anxiety. “Our chief concern was that something odd would happen to move interest rates before we had completed the transaction,” says Mr Marshall. Fortunately, the college’s timing was perfect, as the market became considerably more volatile in subsequent weeks.

“It’s been an interesting change, for an institution that has always been comparatively private, to access the capital markets and to have securities outstanding in that market now. Colleges have traditionally been more detached. Now we are more engaged, mainly through our old members, and this provides a valuable perspective,” says Mr Marshall.

The funds will be used for general corporate purposes, including investment. In years to come, they may also help to fund college facilities. “In the long run, it will make a difference to the student experience but in the short term, students won’t notice any change. We won’t be asking them to pay the interest but we won’t be spending the money either!” says Mr Marshall. 

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Read more about:  Banking strategies , Issuer , Western Europe , UK