University may be nearing credit limit

Columbia may be approaching its credit limit.

University President Lee Bollinger said at a September University Senate meeting that Columbia now has to exercise caution in the amount of debt it assumes. To maintain its AAA credit rating, the University cannot exceed a certain debt capacity.

A rating from an outside credit rating agency, such as Moody’s Corporation, provides information for lenders about the credit-worthiness of a borrower, such as Columbia, based on debt and other factors. AAA is the highest rating, which denotes the lowest risk of credit default.

According to online records of the University Senate plenary meeting minutes for Sept. 25, Bollinger “said Columbia can only take on so much debt consistent with its AAA rating. Leaving aside the reasonable debate about whether a AAA rating is worth it, he said, for the moment Columbia wants to maintain it.”

A major concern, according to Bollinger, is that one of the main lenders for international students pulled out last fall, forcing the University to guarantee loans, which makes them “part of the university’s total debt capacity.”

On the issue of lending for international students, the minutes further said, “The president had decided to allow the use of university debt capacity for this purpose. He noted that a large percentage of these loans end up in default, a fraction likely to rise under conditions of economic distress.”

Economics professor Brendan O’Flaherty explained in an e-mail, “The credit rating is the judgment, partly subjective, by the credit rating agency, of how likely Columbia is to pay back the money it borrows. That depends on such things as size of the endowment, value of real estate that could be sold, underlying strength of the institution as a business, and of course, how much debt has already been issued and how much is likely to be issued in the future.”

Robert Kasdin, Columbia’s senior executive vice president, said in an interview on Sunday that—though he did not attend the Senate meeting—the University is being careful. “At this time, financial prudence requires Columbia to remain cautious as it considers borrowing funds,” he said.

According to the 2009 Trustees of Columbia University financial statement, the University’s current debt total is $1,396,407,000, which reflects the “total bonds and notes payable.”

Kasdin declined to comment on the specifics of the University reaching its debt capacity and credit limit.

When asked about the relationship between the current state of the University’s credit and funding for its planned 17-acre campus in Manhattanville, Kasdin said, “Columbia will continue over time to fund new construction across all of its campuses with its traditional combination of gifts, cash, and debt.”

According to several economics professors, the AAA rating could have important implications for the University’s financial standing, though some questioned the validity of the rating process itself.

Economics professor Sally Davidson wrote in an e-mail, “The AAA rating means that Columbia can issue debt at a low interest rate, and this is important. A downgrade of its debt to AA, for example, would mean an increase in the interest cost on new debt issuance of between 1/8 to1/4%. This is the downside.”

Davidson added, “In addition, Columbia’s peers—Harvard, Princeton, Yale, Stanford, MIT all have AAA ratings—does Columbia want to drop below this group? Probably not.”

Economics professor Phoebus Dhrymes—who co-authored a study examining the basis of the grades given by the three credit rating agencies—wrote in an e-mail that there were still lingering ambiguities over the actual basis of the grading process.

“The three refused to disclose to us the precise basis on which their ratings were issued; we were only told that the criteria used had to do with their evaluation of the probability of default,” Dhrymes wrote.

Despite these uncertainties, he said, the rating still matters. “If Columbia loses its AAA rating it means that, in the eyes of the people who buy its debt, its bonds become more risky.”

Dhrymes added that this situation reflects the current national state of the economy. He said, “This is a bit reminiscent of what is happening today in a larger political context, where recent additions to the national debt have led to concerns about endangering the credit rating of the US.”

An earlier version of this article included the wrong order of magnitude for the figure for University debt. The financial report lists figures in thousands of dollars. Spectator regrets the error.