Harvard University 57583R5P6
March 24, 2020 - 9:27am EST by
otto695
2020 2021
Price: 101.00 EPS 0 0
Shares Out. (in M): 50 P/E 0 0
Market Cap (in $M): 50 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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Description

I am recommending a group of bonds which some in the club may know, but others may be unaware even exist: elite university muni bonds. The ones I am focusing on are tax-free, though these issuers also have some taxable bonds which may be of interest for tax-free accounts, etc.  [Just to be clear, I’m not pitching this as a way to make a killing, but rather to consider the aftertax returns from such high quality credits as a cash alternative/safe-haven during this or a future crisis].  

I picked one particular cusip for this writeup—but it’s really just an example. There are multiple cusips available in this class from multiple issuers, some with more liquidity than others.  I have been picking away at these over the last few weeks as a way of parking cash.  You can currently buy these ultra-high quality munis (some call them “supra-sovereigns”, i.e., better credits than  the US gov’t, given their balance sheets, coupled with the centuries-long reputational value), with maturities or call-dates out only 1-5 years with a TAX-FREE yield of 2.5%-3.25% compared with 1-5 year treasuries with TAXABLE yields of 20-40 bips.  This seems like a complete dislocation to me and is far away from the historical “rule-of thumb” that munis trade at approximately 80% of the corresponding treasury yield.  Instead of the historical norm of 80%, the muni-treasury “spread” has ballooned on these from about 125-150% pre-CV crisis to approximately 700-1000%, as the muni bond market has seen a massive sell-off, especially on the short-end. 

The example here is a Harvard bond, with a YTW (just 7 months from now) of 2.99%.  Bear in mind that this is fully tax free if you live in Massachusetts (or in a state with no state income tax) and federally tax-free otherwise.  The other elite universities, such as Yale, Princeton, Columbia, MIT & Stanford have similar bonds, all along the curve.  So, if you live in Massachusetts, California, Connecticut, New York, or New Jersey (or states with no income tax), these are double tax-free.  I have owned various maturities from these issuers for 20+ years, have a ladder, and I generally hold them to maturity.

Why these are “supra-sovereigns”:

1.    1. Endowments are multiples of the debt outstanding, so should be well-covered even if the endowments get cut in half (or more). Below is a snapshot of the endowments of these universities, alongside the debt outstanding. 

Elite universities

 

 

 

 

 

 

 

 

harvard

yale

princeton

stanford

columbia

MIT

 

endowments ($billions)

46

30

26

28

11

17.5

 

debt ($Billions)

5

4

3

7

2

3

 

 

 

 

 

 

 

 

 

 

2.     2. This doesn’t account for the fact that most of these universities are significant landowners worth billions as well.

 

3.    3. Wealthy alumni likely to keep on giving to support these institutions.  Even during downturns such as the 2008-9 financial crisis, these universities attract substantial donations.  Here’s one example:

 

2006

2007

2008

2009

2010

2011

2012

 

yale ($MM given)

517

555

603

433

317

861

347

 

 

4.      4. While I don’t have specific data on this, I know anecdotally that many of these bonds are owned by the proud alumni of these institutions, the same people who give to these universities and therefore these issuers would be especially reluctant to default on them. 

 

If you are interested in these as cash-alternatives, you can do a search for the specific cusips available at any given time, but here are a few examples of cusips I have picked up over the last few days:

 

Issuer

cusip

maturity

call date

moodys

s&p

price

yield-to-worst

ytm

NEW JERSEY ST EDL FACS AUTH REV REV 05.00000% 07/01/2027BDS PRINCETON UNIV SER. 2011B

646065X72

7/1/2027

7/1/2021

AAA

AAA

102.37

3.074

4.611

 

 

 

             

 

MASSACHUSETTS ST DEVFIN AGY REV REV BDS 05.00000% 10/15/2020HARVARD UNIV SER.2010B-1

57583R5P6

10/15/2020

--

AAA

AAA

101.097

2.991

-

 

 

 

             

 

CALIFORNIA EDL FACS AUTH REV REV BDS 05.00000% 05/01/2021STANFORD UNIV SER.U-5

 1301783X2

5/1/2021

View

AAA

AAA

102.07

3.069

 

 

 

 

             

 

 

             

 

CALIFORNIA EDL FACS AUTH REV REV BDS 05.00000% 03/15/2023STANFORD UNIV SER.T-5

130178TQ9

3/15/2023

--

AAA

AAA

105.98

2.866

 

 

 

I think the debt from these elite universities can be held to maturity and you can collect a much, much better aftertax return in lieu of cash/money markets, given the current dislocation, with very, very little risk, but I also believe there is a  good chance the bonds trade up 5-10 percent or more, depending on call date/maturity and an early exit with an even bigger return might be possible & make sense, depending on your situation.

  

Risks:

online education

CV results in indefinite remote-learning eliminating the on-campus experience and also results in reduced room & board fees.

CV could result in fewer international students (most of whom pay full-freight) because of int’l travel restrictions.

Endowments have illiquid PE and other investments.

Munis Lose preferential tax treatment

Universities lose tax-exempt status

ratings agency downgrades versus current AAA

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Catalysts:

Realization that the value of these elite diplomas will endure.

Endowment returns are bad but nowhere near to not covering the bonds.

CV fades or at least the most catastrophic scenario does not unfold.

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