Colby looks to bonds to finance growth

Colby College plans to spend up to a quarter-billion dollars on new campus buildings, with minimal impact on the college's endowment.

As part of its long-term planning process, Colby College in January 2015 issued $100 million in bonds, and currently is working to approximately double its fundraising, to $50 million per year.

“So we're going to have to raise more money than we have in the past, in addition to debt financing,” says President David Greene, who joined the university in 2014 after being executive vice president of the University of Chicago. “Early signs are positive on that.”

Additional funds will allow Colby to move forward on construction of an athletics complex and performing arts center. The projects are expected to provide a substantial lift to those programs, benefiting students and the larger community through state-of-the-art facilities, while also enhancing the school's ability to attract donors, increase its national profile to draw a larger and more diverse pool of applications, and cement its place as a preeminent liberal arts college.

Both projects are still in the planning phase, although the athletics complex is further along, with London-based Hopkins Architects retained for design and Consigli Construction's Portland office has been on-site for pre-construction consultation.

While parts of the existing athletic facilities, including fields, have been updated, parts of the athletic complex date to the 1940s and fail to meet today's competition standards. Performing arts is divided among two buildings that fail to meet programmatic and performance aspirations, the university says.

The athletics center is projected to cost close to $200 million. For the arts facility, early estimates are $50 million to $75 million.

College on a mission

When Greene arrived at Colby in 2014, he immediately moved forward on the two projects, which had been on the books as part of a suite of construction and renovation projects. Many of those other projects have been completed, including new alumni and science centers, an expansion of the art museum and, on the athletic fields, the addition of artificial turf. These and smaller projects were paid for from a combination of a $370 million capital campaign, bonds, cash reserves and endowment funding.

For the two larger projects, the administration and trustees pursued debt financing, issuing $100 million in taxable bonds with a fixed interest rate of 4.25% and deferred amortization that will allow the college to pay back the bonds' face value in 40 years.

“We looked at what we expected for expenditures over the next several years, a projected plan of how we might get there, and what's a reasonable amount for the college to borrow at this particular moment, knowing that, if needed, we could borrow more money over time,” says Greene. “This was an amount that seemed appropriate, knowing that we'll be building in the next several years. It also creates a hedge, if there's some significant downdraft in the economy. So it made sense to go into the market while rates were very cheap and be able to then have support for capital projects.”

Low-interest rates were the key incentive.

“It made sense, given where interest rates were, to go ahead and lock in the debt at the time,” says Douglas C. Terp, Colby's chief financial officer and vice president for administration. (Terp is also a Colby graduate.) “Traditionally, you set a project budget, nail down what you think your fundraising is going to be, then go to the debt market for that particular project. Our concern was about the potential for rising interest rates. We thought it made sense to lock it in.”

Taxable bonds provide the flexibility missing in tax-exempt bonds, which face Internal Revenue Service spending restrictions.

“You have to lay out your exact purpose, and it has to be used in three years,” Greene says of tax-exempt bonds. “With taxable bonds, those limits don't exist, and we're going in at about the same interest rate that we would for nontaxable.”

To pay back the principle at the 40-year mark, in 2055, the college has set up a “sinking fund” — an internal investment account within the endowment — to collect $6 million set aside from the normal operating budget over the next five to six years, then left alone to accrue to $100 million.

“At that time, the board of trustees and administration might decide to reconfigure the debt, but we wanted to be in a position where we provide for our successors to have the resources to repay it,” Terp says.

Payment of the yearly, fixed $4.25 million in interest is also built into the college's regular operating budget. For now, the $100 million is set aside in short-term treasuries, whose yield helps cover interest.

Debt financing on upswing

Increased levels of debt financing has been on something of an upswing among a certain segment of colleges and universities that are well-resourced, with healthy balance sheets, an active alumni base, strong philanthropic support and investment-grade credit ratings, says Bob Shea, a senior fellow in finance and campus management for Washington, D.C.-based National Association of College and University Business Officers.

“The well-resourced schools are doing exactly that,” Shea says. “There are colleges and universities that aren't very well resourced and cannot access the debt capital markets because of the thinness of their margins and operations.”

Those schools, he says, tend to be wholly tuition-dependent, lacking endowments, unable to raise much money, and unable to take on debt that adds to their annual expenses.

“The issue on the lower end of the bond rating scale is whether colleges have the capacity to take on debt and the ability to pay it back. Ultimately, the only people who can answer that question with any specificity is the leadership team of those organizations and their boards, and establishing a debt policy is a central responsibility of an organization's board. But it's obviously not a question with Colby. They're on the upper end of the spectrum.”

At Colby, the bond money approximately doubles the debt load; previous debt, also through bond issues, paid for previous construction projects. At the time Colby took on the additional debt, in January 2015, Standard & Poor's Ratings Services  lowered its rating one notch, from AA+ to AA — from the highest rating a school can attain to the second-highest rating — with an outlook of “stable.”

Greene doesn't view the additional debt or the S&P rating downgrade as a burden.

“Colby traditionally has had very low debt,” says Greene. “Given our scale, we're still relatively low and in very good shape.”

Moody's Investors Service, which assigned its third-highest rating of Aa2 on the new debt, affirmed its Aa2 rating on Colby's 2012 and 2014 bonds, and also ranked the college as “stable.” Moody's cited the college's strengths, starting with a strong balance sheet of nearly $1 billion in total financial resources that provide it with significant financial flexibility, as well as conservative budgeting and prudent fiscal management, resulting in a healthy operating margin and ample debt service coverage.

Still, Moody's cited growth in fundraising as essential to help the college maintain its position. It also cited as potential challenges an “intensely competitive student market,” Colby's plans to increase financial aid to meet enrollment goals for quality and diversity of its student body and Colby's reliance on student charges to meet about 60% of its operating budget.

Fundraising remains essential

Greene agrees with those points, and he's put increased fundraising and student outreach on the docket.

Funds raised over the past half decade or so have ranged from $20 million to $25 million per year.

“That's significantly behind many of our peers,” Greene says. “Given the capacity of our alumni group and their support, it's striking to me that we are not performing as well as many colleges similar to us. The debt is one part of an overall strategy, in terms of being able to finance Colby's aspirations, but it's not the only part of the strategy. Raising our sights with regard to fundraising is a critical component. I want to make sure we're performing at the highest level in that area. My goal is to move us to a more consistent base of $50 million per year. We passed that number for this academic year. So we're on the right footing.”

With regard to outreach, other initiatives since Greene's arrival include reorganizing the President's office, integrating career services and alumni relations, and expanding the office of admissions and financial aid.

Those initiatives, says Greene, will help raise Colby's visibility beyond the Northeast, while also cementing Colby's position as a preeminent liberal arts college in an environment where higher education is trending to applied skills, and integrating the college in the welfare of the broader Waterville and regional community.

Efforts to reach a broader student audience are already paying off. For the Class of 2020, Colby received 9,833 applications, nearly double the number from just two years ago.

Athletics is part of the college's appeal. Some 40% of students participate in some kind of intercollegiate team.

“It's a major issue in terms of being able to recruit the best students,” Greene says. “These are students who have extraordinary choices. We have a set of athletic facilities that are the oldest in our conference. In the 1950s and '60s, Colby had a great advantage to be able to recruit students. We lost that advantage over time.”

The new facility is equally important for the broader student base, nearly all of whom use the athletics facility; and for the region, he says. Updated facilities will also allow Colby to host competititions, with events helping the local economy.

The same is expected for performing arts.

“It will be great for our academic program, but equally important is to create a vibrant cultural center,” Greene says. “We hope that will be another front door to the community.”

Greene says community integration is important to the college. In recent months, through its downtown Waterville initiative, Colby has acquired five downtown buildings for redevelopment, for both student and community use.

Greene helped pursue similar principles, on a much larger scale, during his previous eight years as executive vice president at the University of Chicago, where he oversaw a master plan to support $3.5 billion in facilities and infrastructure improvement and expansion; capital projects including residence halls, research buildings, and arts facilities; the development of research and teaching centers in Beijing and New Delhi; and the revitalization of community and commercial areas in Chicago.

For Colby, says Greene, the time is ripe for moving forward.

“My sense of Colby, before I came and when I arrived, was that this is an institution poised to take off and secure a spot among the most preeminent colleges in the country,” he says. “It's in that position because real attention has been paid to quality, there's been strong fiscal management for decades, it's got a strong governance system and it's got terrific talent in terms of students, faculty and staff. Colby is well-situated to imagine itself in the future as being among that handful of places acknowledged to be the very best liberal arts colleges in the world.”

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