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Brandeis to restructure debt due to subprime mortgage crisis

Published: February 29, 2008
Section: Front Page


Due to the unforeseen consequences of the subprime mortgage crisis currently plaguing the national economy, Brandeis is in the process of restructuring its construction debt. Despite the extra financial burden, neither students nor construction will be adversely affected, maintained Executive Vice President and Chief Operating Officer Peter French.

In order to finance construction projects like the new science complex and Ridgewood, the university borrowed $62 million dollars last year. According to French, the $62 million is a variable rate loan, meaning the “interest rate is set on a weekly basis.”

“Institutions take out variable rate debt because it tends to be economically advantageous,” he explained.

As it stands currently, the university’s debt is traded on a weekly basis at bond auctions called Dutch auctions. Debt traded at these auctions is primarily insured by a bond insurer, French said.

XL is Brandeis’ bond insurer. At the time Brandeis chose to buy insurance from this company, XL’s rating was AAA, the highest rating a bond insurer can receive. However, the auction market collapsed when XL and other bond insurers were downgraded because of their involvement in the subprime market, French explained.

Consequently, Brandeis’ weekly bond insurance payments spiked from 3% interest to as high as 11% interest. When interest payments reached 11%, the university paid $80,000 more in one week than expected.

Interests rates spiked so high because investors have little faith in bond insurers, said Vice President for Financial Affairs and Treasurer Maureen Murphy. As such, they are demanding more interest to safeguard their investments.

In December of last year, officials began to realize that a shift from the current debt mode was necessary, Murphy said.

As such, “we’re moving very aggressively to get us out of the Dutch auction [system] which will happen in several weeks,” French stated.

Instead of the Dutch auctions, Brandeis will move to a variable rate demand bond. “With VRDB you don’t need a bond insurer,” said French, “instead you have a letter of credit.”

“A letter of credit is another form of guarantee,” explained Murphy. She described a letter of credit as a “credit enhancer. People who buy bonds will look to the credit of the bank and Brandeis” instead of bond insurers.

According to French, “nationally, about 80 percent [of colleges] are doing what we’re doing.” Indeed, neighboring schools like Tufts are also facing similar problems, the Boston Globe reported Feb. 15.

French, Murphy, and Vice President for Budget and Planning Frances Drolette insisted that students will not suffer from the extra spending on bond interest.

French also explained that the university’s original plan to borrow another $40 million later this year for construction costs remains unchanged.

“We have a $300 million plus budget,” French remarked, “we budget the debt service.”

The university budget is “managed with a certain level of flexibility,” said Drolette.

“When you deal with that type of money there’s always a contingency,” Murphy commented echoing Drolette’s statement. “It’s not different than when utility [costs] spiked,” she added.

The subprime mortgage crisis “really caught a lot of folks [in the financial sector] off-guard. There were a lot of mistakes,” said French in regards to the risky mortgage loans that fueled the current crisis, “and now the economy is paying the price. Unfortunately higher education is paying the price too.”