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Bullish McGill bonds
Financial movers and shakers from across North America have shown remarkable confidence in McGill's future.
On Sept. 12, the University opened the book for the sale of $150 million in unsecured debentures and the market responded with immediate enthusiasm. In one hour, the issue was oversubscribed, at an issue yield of 6.185 percent.
The debenture issuance, a first for McGill, was even oversubscribed by $50 million. "We could easily have sold $200 million in bonds," says Vice-Principal (Administration and Finance) Morty Yalovsky. "It's good to know the market places such a high value on the University."
Investors were eager for McGill to enter the bond market following its excellent ratings from credit analysis firms Moody's Investors Service and Standard & Poor's Ratings Service. Moody's gave McGill an Aa2 rating, otherwise known as High Quality by All Standards.
"Moody's Aa2 rating placed McGill two notches above its rating for the province of Quebec," Yalovsky says. "It's a clear sign that the University has displayed good financial management."
Standard & Poor's gave McGill an AA minus, one notch above its rating for the province of Quebec. The rating, says Paul Calder, a Standard & Poor's credit analyst, "reflects the University's low debt burden by peer comparison, a favourable student demand, prudent management of the University's finances, particularly its large endowment fund and unrestricted financial assets, and McGill's strong academic and research profile."
McGill's rating was also partially determined by its assets: 175 buildings on two campuses, as well as $732 million in library collections, having a replacement value of $2.4 billion. Another important factor was McGill's ability to service this new debt load.
Faced with mounting operational costs and tuition freezes imposed by its provincial government, McGill has become the fifth major Canadian university to raise funds by issuing bonds.
Earlier this month, Concordia University raised $200 million through bond issuance. But unlike Concordia, which raised the money to finance construction of new academic buildings, McGill will be using the debenture proceeds for revenue-generating operations. "We will be very prudent," says Yalovsky, adding that McGill can only afford to invest the proceeds of the debenture in self-financing projects.
About $10 million, for instance, will be invested in the Montreal Genomics and Proteomics Centre on Dr. Penfield Ave. for two floors of bio-business incubators amid the six-storey building. These workspaces will be self-financing, since the labs will be rented to start-up companies in the areas of genomics or proteomics that wish to be closely linked with a university environment.
The lion's share of McGill's bond issue, about $100 million, will be used to address the critical need for additional residence space. The University currently owns and operates five main residence complexes that provide 2,051 beds, but McGill estimates a demand for up to 4,000 beds. That means McGill is short by 2,000 student spaces. "We must invest in our residences to meet current and future student demand," says Yalovsky.
Thanks to the debenture issue, McGill can now resurrect plans for the construction of a fifth unit in the Bishop Mountain Residences complex on University St. This unit was proposed in the 1961 development plan for the complex and the project will provide approximately 350 additional beds for the McGill.
The University is considering the purchase of one or more existing buildings, in or out of the downtown core, to be converted into student housing. "We have to look at all the options," says Yalovsky. "Our debenture money will not be spent at once and the refurbishment of McGill's residence network could take eight to ten years."
Another project that will be financed by McGill's bond issue is the revamping of campus food services facilities, as part of an overall integrated food service for the University.
While it might seem tempting for McGill to have issued another $50 million in debentures to construct its new music and arts buildings, two forthcoming projects in search of funding, the University will not consider using the proceeds of the debenture to build properties that won't be self-financing. "We are not prepared to mortgage the future operations of the University to finance construction without seriously considering the impact of the borrowing on the operating budget of the University.
"We want to continue being prudent about our finances," Yalovsky stresses. "That's why McGill issued debentures instead of pursuing other sources of financing, such as mortgages or lines of credit. Debentures were the best option, since they tell us today what will be our 40-year financing obligations."
Repayment of the principal of McGill's debentures will occur on Sept. 22, 2042. The financial institutions who subscribed to the issue included insurance companies and pension funds.