Opinions expressed in AGB blogs are those of the authors and not necessarily those of the institutions that employ them or of AGB.
In the age of low interest rates and tightening public spending, universities were already turning to the bond market for financing. But, like so many other trends, this one was vastly accelerated by the pandemic, which put a further squeeze on public and charitable funding. The COVID crisis has not only hit government grants and donated endowments, but also impacted international enrollments, leaving many institutions with potential holes in their budgets.
At the same time, persistently low interest rates mean that borrowing costs for universities are at record-low rates. Based on Dealogic data, global bond sales by universities and colleges in 2020 more than doubled compared to the whole of 2019, to over $11bn1.
This expansion in corporate and municipal bond issuance has intersected with a new sector – sustainable finance. Utilizing ESG-led financing provides a strategic benefit to universities and colleges, particularly public and not-for-profit (NFP) institutions with strong ESG commitments of their own.
Building sustainable business models for higher education institutions
Issuing bonds is a key way to finance infrastructure projects, maintaining cash reserves for day-to-day operations and spreading the cost over time. For public and NFP institutions, including those in the Higher Education sector, it’s also one thread in building a sustainable business model.
Take Berea College, a leading liberal arts college, where ESG is baked into the institution’s mission. Berea College’s core goal is to provide affordable higher education, and it was founded in 1855 on the basis of eight ‘Great Commitments’, the first of which is, “To provide an educational opportunity for students of all races, primarily from Appalachia, who have great promise and limited economic resources.” The college was also the first in the South to be co-educational and racially integrated.
Berea is funded by its endowment ($1.4B as of January 2021) and federal financial aid, which means that the college can offer tuition-free education to all students, while maintaining less exposure to competition on the student market. But the college does have to compete for philanthropic dollars and diversifying its funding means it can continue to thrive in a volatile market.
To further Berea’s mission, RBC Capital Markets’ Municipal Finance Higher Education team acted as sole manager and sustainability structuring agent on Berea’s $50M Sustainability Bond issuance in Spring 2021. This was also the first sustainability bond issuance for the NFP Higher Education sector and leveraged a unique structure for sustainability funding, which carries both the ESG Green Bond and Social Bond designations. According to Berea College’s Chief Financial Officer, Jeff Amburgey, “Completing this financing allowed the College to not only issue the sector’s inaugural sustainability bond, but also provided resources to help fund current capital projects as well as a facilities fund which will enable future green investment on the College’s campus in support of our mission.
In addition to enabling the development of green projects on campus, the bond funds are to be invested alongside Berea’s endowment to support future capital expenditures and maintenance in perpetuity. This takes advantage of Berea’s ability to borrow at interest rates lower than the endowment’s rate of return. Notably, Berea is one of only 13 “AAA” credit rated colleges, a rating it maintained even after taking on the additional debt for this transaction. The final pricing level (+120 bps (1.20%) above the 30-year US Treasury yield) reflected the demand for highly rated taxable municipal credits and the ESG designation. The 50-year bullet maturity represents the longest tenor sold by any academic institution in the US since the start of the COVID pandemic in 2020.
With this source of sustainable funding, Berea is poised to continue advancing its mission. RBC’s former Investment Banking Analyst of NFP Healthcare, Harry Tsiagbe, and current Investment Analyst at International Finance Corporation, World Bank Group, attended Berea College. His career began through the opportunities that Berea unlocked for him and he offers a unique perspective on Berea’s ESG goals, and RBC’s partnership. “Berea is an incredible institution, and the work it does is truly profound. Beyond opening new pathways and opportunities for its students, the College is also exemplary when it comes to sustainability and good environmental practices. That aligns very well with RBC’s own mission to help clients thrive and communities prosper. Together, this is an exciting partnership that will help Berea continue to deliver on its mission.”
Sustainable bonds, sustainable business
Sustainable financing is an enormous opportunity for public and NFP higher education institutions. Social bonds, and green and sustainability-linked bonds where appropriate, open up a new, rapidly growing universe of investors. According to BloombergNEF, the global sustainable debt market grew 29% to a record $732 billion in 2020, helped by an explosion of bond issuance for social projects amid fallout from the pandemic2. Social bond issuance jumped sevenfold to $147.7 billion in 2020, and issuance of sustainability bonds – which allow issuers to use proceeds for both green and social projects – rose 81% to $68.7 billion.
These numbers tell a story of growing investor demand, a receptive market and the continuance of low interest rates, which together can help finance the future for public and NFP universities and colleges.
To learn how sustainable bonds can further ESG objectives and build sustainable business models in higher education, please contact RBC’s Municipal Finance Higher Education team.
2 Social Bonds Propel ESG Issuance to Record $732 Billion in 2020. Bloomberg, 2021.
3 Average percentile ranking compiled from our four top-tier ESG ratings/rankings, including Sustainalytics, MSCI ESG Rating, FTSE4Good and RobecoSAM’s Corporate Sustainability Assessment.