The next phase of Cambridge University’s growth

In August 2012 the University of Cambridge got planning permission for its £1 billion expansion in the area known as North West Cambridge, which is a roughly triangular shaped area of land bounded by the M11 motorway to the west, Madingley Road to the south and the existing urban development along Huntingdon Road to the east. The development, in the planning since 2003, will allow thousands of new homes, some for University staff and students, some for the general public, plus research space and private company facilities. It will take up to 20 years to complete and will allow some of the existing, out of date, central Cambridge buildings to be emptied and redeveloped.

The University floated a 40 year AAA-rated (top credit quality) £350 million bond in October 2012, to raise funds to pay for the first stage of the development and to do major work on the New Museums Site in central Cambridge. The bond was reported as the first time the University had raised funds through the issue of a security. As a member of St Catharine’s College I have to point out that this is incorrect. The latest edition of the St Catharine’s College Magazine has a short article by the bursar, Simon Summers (formerly at Barclays Capital) on Catz’s issue in 1965 of a 30 year first mortgage debenture.

The Catz bond raised £250,000 at an interest rate of 7%. This paid for a brand new hall (not the most beautiful building in the college but the previous, very charming one was simply too small – it’s still there by the way) and for various other works. I would guess that today you would be talking about £10m-£15m for equivalent work. The point of that comparison is to show how dreadful an investment the bond was, along with most other fixed income securities issues at that time, because of the high inflation of the 1970s. The college had to repay the bond’s principal in 1995, when £250,000, while hardly trivial, was a great deal less of a burden than it would have appeared in 1965 money.

The interest rate of 7% seems high by comparison to the University’s recent 3.75%, a spread of 0.6% over the UK government borrowing rate. But the 20-year UK gilt rate in 1965 was 6.6% so Catz got pretty good pricing. (This data was easier to get from the Federal Reserve database than that of the Bank of England by the way).

Long term UK interest rates are currently low because of a combination of pressure on long term institutions such as pension funds and insurance companies to match their liabilities with bonds rather than equities and the poor long term outlook for the UK economy, which implies low inflation. The University of Cambridge is both creditworthy and one of the few institutions in the UK that can confidently be assumed to still be here in 2052, at least based on previous history. So it’s not surprising the issue was popular.

Of course this is not intended to be investment advice or any inducement, encouragement or solicitation to buy the bonds….

The Catharine wheel

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