Daigaku ronshu: Research in higher education Issue 52
2020-03 発行


Debt Financing in US Universities in and after the Financial Crisis
Mizuta, Kensuke
In the competitive municipal bond market, US universities have accumulated knowhow and capability to handle their finances through tough negotiations with financial institutions. The financial crisis in 2007-08 was a tremendous challenge for universities to overcome. They had to keep necessary capital to maintain their operations and capital projects during the crisis period. While it is certain that US universities learned a lot from this experience, Japanese universities can also take lessons from what they learned. From this viewpoint, this paper: 1) summarizes a variety of university debt finance instruments in the United States, 2) describes how US universities acted in and after the crisis, and 3) comments on what Japanese universities can learn from the above.
US universities had increasingly used variable debt securities before the crisis; for instance, Auction Rate Securities (ARS) and Variable Rate Demand Bonds (VRDBs) had rapidly prevailed. ARS had offered universities large benefits because its holders didn’t have “put-options” and universities had enjoyed low interest rates which were periodically renewed at auction. However, ARS have no longer been issued since 2008, when most of the auctions started failing because broker-dealers (mainly investment banks) withdrew from the market. VRDBs issuance skyrocketed in 2008 for refinancing ARS, but shortly started decreasing since 2009 because their liquidity risk was heightened by their “put-options.”
The US financial sector has developed a variety of credit enhancement tools such as bond insurance and letters of credit (LOC). However, they did not functionally hedge the risk associated with variable rate instruments in the crisis. For, example, insurance companies had offered the bond insurance to universities’ ARS; but their credit rates suddenly deteriorated in the crisis because they had insured a lot of financial products structured with sub-prime loans. Commercial banks’ LOC became unavailable for universities because of the banks’ liquidity problem. As such, universities’ guardians died on the backstage.
After the crisis, callable fixed rate debt has become more popular. This means that universities have become more risk-averse and conservative while the interest rate has remained historically low under the Federal monetary policy. However, Japanese universities should not think that they can continue to use their primitive financial strategies. From the experiences in the United States, Japanese universities can learn that both risky but favorable financial instruments and their risk-hedges may collapse simultaneously under the malfunctional market conditions of a crisis.
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