Worsening market conditions have led ASU to refinance several large developments, most recently the Hassayampa Academic Village.
Unanticipated increases in the interest rates of variable rate bonds, partly due to tumultuous U.S. finance markets, have contributed to ASU’s refinancing of four out of five of the University’s variable rate projects.
The refinancing will likely save the University millions of dollars in the long run, said Gerald Snyder, ASU senior associate vice president for finance and deputy treasurer.
ASU usually has about a third of its construction projects financed by variable rate bonds, he said.
A variable rate bond is a type of finance with an interest rate subject to change based on market conditions and other factors.
As of Friday, ASU was obtaining approval from the Arizona Board of Regents to change some of its fixed-rate debt to variable when the debt markets are more stable. This is in order to rebalance the University’s debt portfolio with a more even proportion of fixed and variable rates.
According to a statement from Carol Campbell, ASU’s executive vice president of business and finance, the University has determined that its best course of action is to only take on fixed-rate debt in the current market situation.
In the long term, the statement said, a ratio of one-third variable rate debt and two-thirds fixed-rate debt for University projects is the best situation.
“At this ratio, we take advantage of the historically lower short-term [variable] rates without taking on too much interest rate risk,” the statement said. “We also aggressively refinance fixed rate debt [to lower fixed rates] when long-term rates fall.”
Four campus projects currently use variable rate loans: Biodesign A, Sun Devil Energy Center LLC, Nanotechnology Research LLC and the Brickyard on Mill Avenue, Snyder said.
Three have been refinanced since May 2008 or are now being refinanced due to unanticipated increases in rates, partially due to the municipal bond insurance companies insuring them, Snyder said.
According to an April ABOR document, bond insurance companies have come under financial pressure because of the problematic sub-prime mortgage markets. Because of the companies’ exposure to increased risk in these markets, the bonds they insure have seen dramatic interest rate increases — like the rise in Hassayampa’s interest rate, according to the document.
The Hassayampa Academic Village was refinanced from a variable rate to a fixed rate by early September, Snyder said.
The project was initially financed by a variable rate bond of about $140 million with rates in the 3 percent range, Snyder said.
Opting to use a variable rate loan and taking advantage of the historically low rates was appealing, he added.
“We saved several millions of dollars by initially going with a variable rate,” he said.
But as recently as August, Hassayampa’s variable rate had about doubled and was in the 6 to 7 percent range, he said, attributing the jump to the “market dislocation that had occurred last spring.”
When the project was refinanced, the new fixed rate interest was 5.3 percent — compared with ASU’s initial interest rate assumption of 5.75 percent, Snyder said.
“We’re very happy with the interest rate change,” he said.
Professor Dennis Hoffman, director and associate dean for research and doctoral programs at the W. P. Carey School of Business, said in an e-mail that the University’s overall finance strategy is sensible.
“[The] ASU administration has a broad-based, risk-averse overall portfolio strategy,” he said. “The question is, 'Does their overall strategy make sense?' And to me it does.”
Reach the reporter at matt.culbertson@asu.edu.
