The University of California set a record last week by selling the largest bond offering of its kind at $860 million, officials say.
UCLA will receive almost half of that total. University officials are still working out the details of when and how the money will be dispersed, said Steven Olsen, vice chancellor of finance, budget and capital programs at UCLA.
The bond is the largest offering in history for any university system, said Dianne Klein, a spokeswoman for the University of California Office of the President.
“(The agreement) shows (investors’) tremendous faith in the university,” she said.
A bond is similar to a long-term loan that is repaid to investors over a set period of time with interest. It’s a way of borrowing money that allows investors to profit over time, while helping institutions like the UC secure the needed money, said Richard Roll, a professor of applied finance at the UCLA Anderson School of Management who specializes in bond markets.
Though a bond usually is paid back in shorter time periods than the UC bond, it is not unheard of to create a bond with such a large repayment period, he said.
The offering was initially pegged at $500 million but was later expanded to $860 million after investors showed a strong interest to invest in the UC, Klein said.
The university has 100 years to pay back the money, which will mostly be used for building projects at various UC campuses, she said.
Olsen said UCLA will receive about $400 million from the bond. The money will be used to finance the renovation of the Center for Health Sciences South Tower, which was part of the former UCLA Medical Center, as well as the construction of a new engineering building.
One of the risks of a bond, Roll said, is that if the institution issuing it declares bankruptcy during the loan period, then it is not obligated to repay the money to investors. This risk helps determine how high or low the interest rate will be, Roll said.
The higher the interest rate, the less confident investors are in the university, state or nation’s ability to repay over time, he added.
The UC will pay 4.858 percent interest on the loan annually, which is relatively low based on the current U.S. Treasury rate of slightly more than 3 percent, said Tom Dresslar, director of communications for the California State Treasurer’s Office, which helped broker the deal.
This means investors are confident the UC will be in good shape to repay the loan over the next hundred years, Klein said.
She said that more than 70 investors participated in the transaction and bought the bonds.
Universities are sensible institutions to invest in because they tend to survive when large corporations or even nations might collapse, said David Jacobson, a spokesman for Moody’s Investors Service, an international company that assigned the UC its credit rating and helped create the transaction.
In November 2011, Moody’s upgraded the UC credit rating to Aa2 status, which is one of its best credit ratings, Jacobson said.
A better credit rating means lower interest rates, which will ultimately save the UC money over the repayment period, he added.
Jacobson used the Massachusetts Institute of Technology, USC and the California Institute of Technology as examples of other universities that have recently sold bonds of similar, though smaller, size.
“There are universities in Europe and America that have been around for centuries,” he said. “We rated the University of California highly because it and its various campuses will be around for a long time.”