A medieval institution entered the modern financial era on Wednesday, when Cambridge University used the public bond markets, rather than philanthropy, to fund major new building developments for the first time in its 800-year history.
Britain's richest and second-oldest university issued a 40-year, £350-million ($560-million U.S.) bond, taking advantage of low yields to fund a new laboratory for stem-cell research and accommodation for postgraduates.
The university, which was ranked fifth in the world in the latest Shanghai Jiao Tong rankings, has in the past relied on benefactors to fund development. Its roster of donors ranges from Lord Sainsbury, the university's current chancellor, to Henry VIII.
Of the change in approach, Sir Leszek Borysiewicz, vice-chancellor, said: "The university has always been funded by major benefactors and this is the first time we have taken on any significant borrowing."
Andrew Reid, finance director, said Cambridge could have funded the developments directly, but that with "long-term interest rates at historic lows, now seemed like a good time to borrow."
The bond, priced at 60 points over gilts, was well received. Last week, the university was awarded a triple-A rating by Moody's. The agency said the rating reflected Cambridge's "outstanding market position, significant amount of liquid assets and strong governance structure."
The central institution, rather than any of the 31 colleges that make up the university, has issued the bond. Without counting the assets of the colleges, it holds £2.6-billion in net assets.
Cambridge is Britain's only billion-pound university, spending £1.2-billion in 2010-11. According to the Case-Ross survey, Cambridge, along with Oxford, attracted half of all donations to British universities in that year.
Several pension funds have been showing interest in backing English universities. The well-regarded sector ran a £1-billion surplus on its £23-billion income in 2010-11, and held £24-billion in assets, net of all liabilities. Moody's has also praised the sector's strong regulation and high liquidity.
De Montfort, a Leicester university with expenditure of £150-million in 2010-11, issued a £110-million, 30-year bond in July.
The cap on tuition fees has been raised from £3,375 to £9,000, meaning that many universities will have more income. But the same package of higher education reforms mean they now receive less direct subsidy for new buildings and equipment.
"After this I am sure there are more universities out there which are thinking of getting a rating and accessing the capital markets," said Russell Maybury, head of corporate debt capital markets for the U.K. and Ireland at RBS, which was on the deal with Morgan Stanley and HSBC.
Average yields on corporate debt have fallen sharply in recent months following central bank action around the world, with Barclays Euro Corporate Bond index showing yields have fallen a full percentage point since the start of the year to 2.4 per cent, down from 2.8 per cent in late June.