April 12, 2010

Univ. Will Incur Debt to Finance New WCMC Building

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The University will announce Monday that it plans to incur $285 million in debt to finance a construction project at Weill Cornell Medical College. In addition, the University intends to restructure its portfolio of existing debt.

Debt Financing for WCMC Construction

The new funds will help finance a new, $650-million facility in New York City that will feature a cancer center and focus on interdisciplinary research and collaboration between the Ithaca and New York campuses. Construction has already begun on the 16-floor, 480,000 square foot Medical Research Building, which is scheduled to be completed by July 2013. More than $360 million of the project’s cost has already been raised from philanthropic donations, including about $135 million from Sanford Weill ’55. Weill advanced a total of $170 million to Cornell ahead of schedule in January 2009, which University officials said helped inspire other donations.

“The new Medical Research Building in New York City is the centerpiece of Weill Cornell’s current strategic plan, and it is central to advancing the college’s tripartite mission of education, research and clinical care,” DeStefano stated.

Cornell’s decision to take on an additional $285 million in debt continues a recent trend of drastically increased borrowing.  Over the past two years, the University’s total debt has nearly doubled.

At the end of June 2008, the University owed about $1 billion in debt. That figure grew to approximately $1.7 billion in March 2009 after Cornell sold an unprecedented $500 million in bonds to remedy concerns about short-term institutional liquidity and an additional $305 million in bonds to fund capital construction projects.

After the University incurs the debt next month to finance construction at the medical college, the University will owe $1.96 billion in debt, according to Moody’s Investors Service.

Changes to Current Debt Portfolio

DeStefano said in a statement that the University will convert about 50 percent of its tax-exempt variable-rate debt to fixed-rate debt — a move that DeStefano said reduces risk and takes advantage of “historically near-low interest rates.”

Cornell is also “contemplating” a decision to terminate about 30 percent of interest-rate swaps tied to its debt. The University originally included these financial instruments in its portfolio over the past few years to hedge against rising interest rates. Cornell would have to pay $39.9 million to end those contracts, which are tied to at least $475 million of its bonds, according to BusinessWeek.

The University’s current financial state and its future plans prompted Moody’s last week to lower its outlook on Cornell’s Aa1 ranking from “stable” to “negative.”

“The University is prudently taking advantage of current market conditions to reduce risk in our debt portfolio, and we believe the recent credit ratings reflect our actions,” DeStefano said in a statement. “The goal is to complete the transactions by the end of the fiscal year.” Cornell’s fiscal year ends on June 30.

The last time that a rating service reduced Cornell’s status was last March when Standard & Poor’s Ratings Service lowered the University’s credit rating by one noch to “AA” from AA+” as it announced a large bond offering and $200 million budget shortfall.

At that time, Moody’s rating service maintained its “Aa1” credit rating — the second-highest on Moody’s scale — for Cornell. Last week, Moody’s continued to maintain the University’s rating but lowered the outlook of that ranking from “stable” to “negative,” which signals that the rating may soon be downgraded, according to BusinessWeek. Moody’s cited several reasons for the change, including a decline in donations to the University, its “significant amount of debt and large expense base.”

A drop in Cornell’s credit rating would make it more costly for the University to borrow money to finance its projects.

Original Author: Michael Stratford