Home > Current Events, Numbers > Liberty University bond rates, etc.

Liberty University bond rates, etc.

There is a fascinating staff article in the Lynchburg paper today regarding an upcoming bond issue from Liberty University [link]. Let me do a line-by-line here, and offer some analysis:

Liberty University on Tuesday sold $120 million in tax-exempt education facilities bonds, which it will use to pay for recent capital projects and new construction, school officials announced this morning.

Rather than pay cash for capital projects, as it has done in recent years, LU is taking advantage of its high AA bond rating as well as low interest rates and tax-exempt financing, Chancellor Jerry Falwell Jr. said in a statement.

First of all, let me congratulate Jerry Jr. for the financial footing Liberty has been on; I’m glad to hear that they’ve been paying cash for everything (and I guess not stiffing anybody). Rates have been so low the last couple of years it must have been tempting to take on a bunch of debt.

We know the total face amount of the bonds (the amount of money Liberty received), the fact that the bonds are tax-exempt (and so are tax-advantaged like municipal bonds), are AA-rated, and that this information came from a press release from Jerry Falwell Jr. via Liberty’s press office.

The tax exemption means that whoever bought the bonds will not have to pay taxes on the payments they receive. The AA rating means that the interest rate is some spread over a reference bond (e.g. Treasuries) for the appropriate term (e.g. 10 years). For example, right now 10-year Treasuries have yields of about 2.7% and 10-year AA municipal bonds have yields of about 3.1% [link]. AA bonds are considered high quality, but there are two ratings that are higher: AA+ and AAA [link], and those have slightly lower yields. These Liberty bonds have already been sold; probably via a broker who took a fee. That means Liberty already has the proceeds in hand and has probably already agreed to spend the money.

We don’t know the term of the bonds, so there’s no way we can say what Liberty will ultimately pay for the bond issue (hint: it isn’t $120 million) nor over how many years, and we can’t figure what the current value of the total cost would be. Here by way of contrast is a better description of a bond issue, from Zoe Weinberg/The Harvard Crimson [link]:

Harvard’s $601 million bond sale on Tuesday raised 20 percent less than had been planned earlier, as rising interest rates led to a decision to shrink the size of the deal.

The bonds were priced at a premium, with 10-year bonds yielding 2.54 percent—20 basis points lower than the benchmark for AAA-rated institutions on municipal debt due in 10 years, according to Bloomberg.

While overall interest rates remain low, rates on longer-dated tax-exempt municipal bonds such as those issued by Harvard rose about 10 to 13 basis points on Tuesday …

Morgan Stanley served as lead underwriter.

Last week, Harvard sold $300 million of taxable 30-year bonds.

The Crimson article is chock-full of detail, including Harvard’s outstanding debt, who rated the bonds, a summary of the relationship between price and yield, etc. Written by a college kid at a college paper. Let’s get back to the article about Liberty.

LU’s plans for new construction include a new lawn behind the Arthur S. DeMoss Learning Center, a new library and other projects that will “revolutionize the look and the feel of campus,” Falwell said.

“It is humbling to me to witness God’s blessings of such magnitude on Liberty University. This is a wonderful Christmas gift to Liberty and its students,” Falwell said.

The first paragraph here suggests that the money will be spent over the next couple of years; Falwell has already announced plans for construction, all of it happening very soon. As an alumnus I hope this means that the bond term will be commensurate, so these are more like 2-year or 3-year rather than 10-year bonds.

The second paragraph is a reminder that Liberty is a religious institution (as well as a business), and there may be a hint here that now would be a good time to send Liberty a check.

LU said its strong financial standing partly contributed to its AA bond rating. The school’s net assets have increased from $100 million in 2007 to $530 million today, and LU expects net assets to exceed $1 billion by 2014.

The school also credited LU’s graduation rates and its graduates’ success at paying back loans.

The bond rating comes from some outside agency (either Fitch or Standard & Poors; Moody’s doesn’t give a AA rating), so somebody must be seeing at least Liberty’s debt to equity ratio, a description of their outstanding debt, a story about recent and probable future donations. The net assets number here is probably from that pool of data, and all we can tell from the last number is that Liberty expects net assets to grow more slowly in the future: there was a five-fold increase over the trailing three-plus years, but they expect it to less than double over the next three-plus. I’m inclined to read this as good news, rather than as an indication that somebody plucked a big round number out of thin air.

Finally, the last line suggests that Liberty has been financing a fair amount of student debt in-house: people generally graduate before starting to pay back student loans, and defaults on these loans tend to undermine the expected value of future loan payments as a pool. This wouldn’t matter if someone else were financing Liberty student loans.

My takeaway from all of this is that Jerry Jr still sees the local paper as an extension of Liberty’s public relations effort, rather than as part of Liberty’s accountability effort. But perhaps I’m just being harsh. I can’t fault the staff at the Lynchburg paper here; they’d have to do some real digging to fill in the rest of the story, and chances are nobody in Lynchburg cares about the extra detail.

The comments at the Advance site are interesting; there’s the usual grousing about these bonds being tax-exempt. The implication being that the tax burden has to be carried by someone else; I’m not sure how one would measure that. It’s possible to measure lots of things, including e.g. the cost of free parking, but the tax benefits of tax-free bonds is hard to measure. There are opportunity costs, multiplier effects, etc. vs. the imagined value of the taxes paid if a smaller pool of bonds were taxable. It’s not like somebody (not sure who) had to write somebody else (again not sure who) a check for the tax on the bond coupons.

There’s also the usual “Liberty till death” stuff. I really wish these people had an opportunity to buy some of these bonds. Just saying.

Harvard’s $601 million bond sale on Tuesday raised 20 percent less than had been planned earlier, as rising interest rates led to a decision to shrink the size of the deal.

The bonds were priced at a premium, with 10-year bonds yielding 2.54 percent—20 basis points lower than the benchmark for AAA-rated institutions on municipal debt due in 10 years, according to Bloomberg.

While overall interest rates remain low, rates on longer-dated tax-exempt municipal bonds such as those issued by Harvard rose about 10 to 13 basis points on Tuesday

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