In May, Princeton University, a non-profit with access to the tax-exempt debt markets, chose to issue $300 million of taxable debt with a corporate CUSIP side-by-side with a traditional $300 million tax-exempt deal.
That’s because the taxable corporate CUSIP bonds allowed it more flexibility with proceeds than tax-exempts do, a university official said.
“The university issues taxable bonds due to greater flexibility in the use of proceeds and to ensure that we are fully in compliance with IRS regulations,” Michael Hotchkiss, director of media relations for Princeton, said at the time. “Princeton is a 501(c)(3) organization, and as such, for directly issued taxable debt, along with other private universities (Harvard, Columbia, MIT, etc.) we must use a corporate CUSIP, unlike public universities (University of Virginia, Michigan, California, etc.), which can use a muni CUSIP.”
The university isn’t alone in tapping the corporate market.
In the late aughts, the University of Delaware took advantage of the Federal Reserve allowing several institutions to issue taxable debt and issued corporate CUSIPs, said Scott Douglass, the university’s CFO at the time.
“It had to do with what we wanted to do with it,” said Douglass, who currently serves as vice dean of the Wharton School of the University of Pennsylvania and has also been CFO at North Carolina State University.
The university had bought a 272-acre shuttered Chrysler car assembly plant. Everyone, he said, was nervous about it, thinking there would be environmental issues. But through the deal, the university was able turn an “old toxic waste dump” into a “incredible campus with close to a dozen buildings,” later called STAR campus.
“It’s beautiful, and it’s been a research hub,” he said. “It’s created all sorts of opportunities for the university.”
Prestigious private universities and colleges, like Stanford, MIT and Harvard, have been issuing corporate CUSIPs since the mid-2010s, at a time when they were doing major expansion projects and rates were attractive, said Barclays strategist Clare Pickering.
This was an opportunity, she said, to tap into U.S. names of brands that crossover buyers were fully aware of, with high-quality, double- or triple-A-rated issuers.
“Market access made sense, the price, the deal size made sense,” she said.
But since 2020, there has been less activity.
Issuance of corporate CUSIPs by the nonprofit health and higher education sector hit a high in 2020 when $37.4 billion of corporate CUSIPs were issued in the two sectors. Issuance dropped 43.2% in 2021 when $21.3 billion was issued, according to Bloomberg.
Year-to-date, such issuers have sold $8.9 billion of corporate CUSIPs and with less than three months for the remainder of the year, 2022 is unlikely to top 2020’s and 2021’s totals.
Pickering noted it may not make sense to do an expansion currently and add additional debt service on the balance sheet, especially as universities and colleges deal with the reality of the pandemic and face supply-chain problems that could impact their timeline.
The drop off in the issuance is due, in part, to the rising interest rate environment, according to CreditSights strategist Pat Luby.
Prior to the selloff in the market, it was easier to sell taxables to refinance tax-exempt, but now, the impetus to sell taxable is greatly reduced, he said.
“Given how rates have risen so quickly, issuers are a little bit more careful about when they want to enter the market,” said Gerri Magee, managing director at Evercrest Advisors. “There’s less refinancing activity given where levels are and more careful consideration for when and how to finance any new-money issues.”
“But these bonds received a very strong response from the market, so I would expect even if market conditions aren’t favorable now to see these schools following the corporate market again,” Luby said of corporate CUSIPs.
Once rates stabilize, there could be an uptick in issuance when rates stabilize, but it’s hard to know for sure.
Overall, the higher education sector is at an influx after being hit harder than others during the pandemic.
There are still many unknowns at play, such as the size of universities’ endowments, post-COVID enrollment numbers, federal relief aid that could be masking some underlying challenges and whether it makes sense for crossover buyers to add these names to their portfolio, Pickering said.
Scale, though, can make all the difference, according to Pickering, as leading institutions with substantial endowments should be able to weather any reduction in enrollment and in-person instruction. Smaller, regional and localized institutions, however, face a more difficult path to a post-COVID recovery.
“The higher and better quality you are in the broader scale and attractiveness and brand, you’re that much more able to withstand some of these issues,” she said.
“Debt financing, though, is going to do to continue to compete, [corporate CUSIPs] remains a pretty viable and flexible way to raise funding.”
From an investor’s perspective, being able to add a different type of credit, such as a global brand university with an endowment and strong credit ratings, to an investment grade corporate bond portfolio consisting of debt from for-profit companies can be a good credit diversifier, he noted.
“It is a different type of credit risk in a portfolio not necessarily correlated with the economy like a traditional corporate bond would be,” Luby said.
Corporate CUSIPs allow for a different and broader set of investors that understand and have the authority and allocation for a corporate, according to Pickering.
Corporate CUSIPs over $300 million are included in the U.S. Aggregate Index, making them a component of a broader index. And the deal size, at that threshold, is appealing to a market that has expectations of liquidity and access, she said.
Proceeds from a taxable deal are much simpler for an issuer to handle.
“There are some issuers that are a little bit more averse to the ongoing requirements and restrictions and tracking of tax-exempt debt,” Magee said. “And so they have a preference right off the bat for taxable debt.”
To use a taxable municipal CUSIP, private universities must issue through a municipal issuing authority, which raises the cost of issuance due to fees and lengthens the time it takes to get to market due to the necessary permissions.
Although some market players think taxable investors may overlook that disparity given that public institutions are typically required to use a taxable municipal CUSIP, taxable investors frequently prefer a corporate CUSIP, adding to its appeal.
Issuing in the corporate market, private universities can borrow directly under their own name, allowing them to react quicker, Luby said.
Through the issuance of corporate CUSIPs, universities don’t face the restrictions that come with borrowing in the tax-exempt market, with proceed use offering “total flexibility,” he said.
“Some of that can qualify under municipals but a lot of things they might want to do not,” Douglass said. “Corporate CUSIPs don’t have the same constraints that munis do.”
For example, if the University of Notre Dame, which has corporates outstanding, wants to raise money to refurbish the basilica on campus, they couldn’t use tax-exempt financing. But if they sell corporate bonds, they could use the money to do anything they want sans restrictions, Luby said.
Corporate CUSIPs broaden investor interest in the paper, as the depth of the investment grade corporate bond market is global, Luby said.
“When the university comes to market, it presents an unusual opportunity for investors to get access that credit in a portfolio that won’t necessarily happen again in the near future,” he said.
The corporate bond market, as a global market, is larger than munis. So when a university with global brand awareness comes to market, there’s a strong interest in the bonds, Luby said.
“It’s Caltech, Tufts, Georgetown, Brown, Dartmouth, Northwestern, Harvard, MIT, Notre Dame,” he said. “These are schools that have a global brand.”
Luby said there’s a large audience of potential investors already familiar with at least the school if not necessarily the actual financials.
Moreover, corporate CUSIPs are attractive to foreign investors because it’s a market they understand by the nature of U.S. corporate bonds, Pickering said.
“They’ll see that and say, ‘Oh, that meets the criteria for being in the index,” and the quality name is one they can identify with,” she noted.
For corporate CUSIPs, trades also can be easily executed by most global investors. If a university issues taxable munis, foreign investors may not necessarily have the trading and custodial infrastructure to execute in the U.S. municipal market, Luby said.
Therefore, he said, corporate CUSIPs make it easier for the non-traditional muni investor who’s looking for exposure to muni-style credit risk to get it in a more easily executed way.