University Fails to Sell Bonds
Interest Rate Rises on Debt
Georgetown will be forced to pay higher interest on roughly $100 million of debt after the university failed to sell the debt in bonds at an auction on Jan 22.
Georgetown relied on the financial firm Lehman Brothers to hold the bonds before the auction and to broker the deal. Because Lehman Brothers was unable to unload the bonds through the auction, Georgetown will be forced to pay Lehman an interest rate of 6.6 percent, higher than it had been paying before the auction, because the firm will continue to hold the university’s bonds until a successful auction.
Institutions often finance their debts by issuing bonds, which provide them with readily available funds. The bonds must be repaid with interest after a specified time period.
University spokesperson Julie Bataille said issuing bonds is part of the university’s plan for managing debt.
“Of approximately $750 million total debt, [approximately] $550 million is in the variable rate auction market,” she said.
“Georgetown’s financial plans include the university’s ability to manage debt as part of our overall financial strategy,” Bataille said.
One financial expert said market forces were probably at fault for the failed auction.
“At the moment, there are not a lot of people who want to buy these bonds because of the [national] mortgage crisis,” said certified independent financial consultant Robert Jenvey.
Jenvey added that the timing and market conditions were bad for bond sales.
“Not only was the interest rate too low for buyers, but it also happened around the Martin Luther King holiday and the height of an agitated market,” Jenvey said. “So it was bad timing.”
The university was not the only party that failed to sell its bonds in auction last month. Reuters reported that Clark County, Nev., another Lehman Brothers client, also failed to auction off its bonds.
A spokesperson from Lehman Brothers could not be reached for comment.
Municipal bond auctions occur at least once every five weeks, and Clark County was able to successfully sell its bonds on Jan. 29.
Firms such as Lehman Brothers and Morgan Stanley regularly bid on bonds they already hold to prevent failed auctions, making these failed municipal auctions extremely rare. However, Lehman Brothers did not take this course of action with Georgetown bonds.
While municipal bond auction failures are still rare, failed auctions for other types of bonds have been growing in frequency over the past few months, according to Reuters.
“Some 60 auctions have failed in recent months, representing about $6 billion in tied-up assets,” said Peter Crane, president and chief executive officer of Crane Data LLC, which tracks the market for mutual fund managers, in a Jan. 24 Reuters article.
Bataille agreed that the market is causing problems in the general financial realm, thereby dragging Georgetown into the problem.
“What is happening in the auction markets is a reverberation of what is being seen throughout the financial world because of the subprime mortgage crisis,” she said.
Bataille said that Georgetown’s Chief Financial Officer Chris Augostini is speaking with financial advisers and the university’s Board of Directors to determine what actions to take “in the best interest of the university’s long-term financial position.”
May 20 2008 at 10:35 a.m.
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest at a later date, termed maturity.
Aug 04 2008 at 7:59 p.m.
I wonder how often this kind of thing happens. It sounds like this will cost the University a lot of money in interest payments... that's unfortunate, but a reality when you are auctioning off bonds I suppose.
Dec 10 2008 at 12:21 p.m.
Georgetown is an open campus where students and their guests are largely free to come and go and meet with whom they want.
Jan 24 2009 at 11:38 p.m.
That is bad, 6.6% additional interest is big. Georgetown really have to need to address that and sell all those band.
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Feb 07 2009 at 6:31 p.m.
The campus debt has been badly miss managed and should have been addressed before it got to that stage. The University really need to sort its finances out because the University brings a lot of money into the area from students. If it were to disappeared it would have a giant effect on local businesses which ultimately will effect the local community if the start closing.
Feb 28 2009 at 10:15 p.m.
The so sad that the University did not sell the bonds. 6.6% interest rate is big. I just hope it does not affect the University that much. Cheers, Karltennis camp
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Mar 07 2009 at 2:50 p.m.
One of my friend was about to join there, Thank god, I just had emailed this page to him, I think he will be in safe, however, the university needs to tell all these things, Metha, Liverpool dentist
Mar 08 2009 at 4:31 a.m.
I was wonder when read this articel. How often this kind of thing happens? No one has to stopped.
Georgetown relied on the financial firm Lehman Brothers but Lehman Brothers was unable to unload the bonds through the auction, now Georgetown will be forced to pay Lehman an interest rate of 6.6 percent. I think it is too huge interest.
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Mar 11 2009 at 1:36 p.m.
Hey 6.6% interest is big and i feel it would be a very tough task to clear off these bonds now. After the fall of the big Lehman Brothers, the situation has gone worse now.
Thanks for sharing the information.
Mar 16 2009 at 2:44 p.m.
Yeah, 6.5% interest is big interest in this present situation. The bad thing is if the interest also go up, just like any credit card, that company inflate the interest rate. san diego solar
Mar 20 2009 at 5:18 p.m.
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Mar 22 2009 at 8:42 a.m.
University spokesperson Julie Bataille said issuing bonds is part of the university’s plan for managing debt. I thought it will not help to the university because Lehman Brother already had bee bankrupted. Spokesperson not available from lehman, it indicated that Lehman not interested in all things.
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Apr 25 2009 at 5:49 p.m.
Oh My god, I just wonder while reading this article. I don't think any other universities are having a rule like this, is it? MLM Leads
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Jun 08 2009 at 5:30 a.m.
I wonder how often this kind of thing happens. It sounds like this will cost the University a lot of money in interest payments... that's unfortunate, but a reality when you are auctioning off bonds I suppose.
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